Sierra Electric Cooperative, Inc. 610 Hwy 195 o P.O. Box 290 o Elephant Butte, New Mexico 87935 575-744-5231 o Fax: 575-744-5819 www.sierraelectric.org April 24, 2017 New Mexico Public Regulation Commission Records Management Bureau P O Box 1269 Santa Fe New Mexico 87504-1269 Dear Sir or Madam: Please find enclosed Sierra’s Annual Report for the calendar year ending December 31, 2015 and required filing in accordance with 17.3.510.12(B). Also enclosed is a copy of Sierra’s RUS Form 7, and an Audit Report for the fiscal year ending December 31, 2016. In accordance with Rules 17.1.2.8 (A)(E), all required filings are sent under separate covers. We have not engaged in any activities in reference to Rules 17.6.450.13(A)(B) and SEC Form 10K. Sincerely, Ofet a Melendez Finance Manager Your Touchstone Energy~ Cooperative SEC Is An Equal Opportunity Provider and Employer. RURAL ELECTRIC COOPERATIVES ANNUAL REPORT OF SIERRA ELECTRIC COOPERATIVE, INC. TO THE NEW MEXICO PUBLIC REGULATION COMMISSION FOR THE YEAR ENDING DECEMBER 31, 2016 UJ UJ I-- 0000000000000000000~0~~~0~~~~ 000000000000000000~~~~0~~ ~ 000000000000000~0~~~~~0~ 000000000000000~0~0~0~0~~~ ........................................ 00000000 ~ 0 O000 ~ ~ ~ ~0~ ~ ~ ~ ~ ~0 ~ ~ ~ ~ ~ ~ ~ ~ ~ 0~000000~000~~~~0~~~ ooooooooooo c 0 ~z C ~ 0 0 0 ELECTRIC OPERATION AND MAINTENANCE EXPENSES 1. Enter in the space provided the operation and maintenance expenses for the year. Line No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 Account (a) POWER PRODUCTION EXPENSES STEAM POWER GENERATION Operations 500 Operation supervision and engineering 501 Fuel 502 Steam expense 503 Steam from other sources 504 Steam transferred - Cr 505 Electric expenses 506 Miscellaneous steam power expenses 507 Rents Total operations Maintenance 510 Maintenance supervisions and engineering 511 Maintenance of structures 512 Maintenance of boiler plant 513 Maintenance of electric plant 514 Maintenance of miscellaneous steam plant Total maintenance Total power production expenses - steam power NUCLEAR POWER GENERATION Operations 517 Operation supervision and engineering 518 Fuel 519 Coolants and Water 520 Steam expenses 521 Steam from other sources 522 Steam transferred - CR 523 Electric expenses 524 Miscellaneous nuclear power expenses 525 Rents Total Operations Maintenance 528 Maintenance supervision and engineering 529 Maintenance of structures 530 Maintenance of reactor plant equipment 531 Maintenance of electric plant 532 Maintenance of miscellaneous nuclear plant Total maintenance Total power production expenses - nuclear power HYDRAULIC POWER GENERATION Operations 535 Operation supervision and engineering 536 Water for power 537 Hydraulic expenses 538 Electric expenses 539 Miscellaneous hydraulic power generation expenses 540 Rents Total operation Maintenance 541 Maintenance supervision and engineering 542 Maintenance of structures 2. lfthe increases and decreases are not derived from previously reported fi~ures explain in footnotes. Increase or decrease from Amount for year preceding year (c) $ 0 0 0 0 0 0 o o ) ELECTRIC OPERATION AND MAINTENANCE EXPENSES (Continued) Line No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 4O 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 Account (a) HYDRAULIC POWER GENERATION (Continued) 543 Maintenance of reservoirs, dams and waterways 544 Maintenance of electric plant 545 Maintenance of miscellaneous hydraulic plant Total maintenance Total power production expenses - hydraulic power OTHER POWER GENERATION Operations 546 Operation supervision and engineering 547 Fuel 548 Generation expenses 549 Miscellaneous other power generation expenses 550 Rents Total Operation Maintenance 551 Maintenance supervision and engineering 552 Maintenance of structures 553 Maintenance of generating and electric plant 554 Maintenance of miscellaneous other power generation plant Total maintenance Total power production expenses - other power OTHER POWER SUPPLY EXPENSES 555 Purchased power 556 System control and load dispatching 557 Other expenses Total other power supply expenses Total power production expenses TRANSMISSION EXPENSES Operations 560 Operations supervision and engineering 561 Load dispatching 562 Station expenses 563 Overhead line expenses 564 Underground line expenses 565 Transmission of electric by others 566 Miscellaneous transmission expenses 567 Rents Total Operation Maintenance 568 Maintenance supervision and engineering 569 Maintenance of structures 570 Maintenance of station equipment 571 Maintenance of overhead lines 572 Maintenance of underground lines 573 Maintenance of miscellaneous transmission plant Total maintenance Total transmission expenses DISTRIBUTION EXPENSES Operations 580 Operation supervision and engineering 581 Load dispatching 582 Station expenses 583 Overhead line expenses 584 Underground line expenses 585 Street lighting and signal system expenses Increase or decrease from preceding year (c) Amount for year (b) $ 5,036,058.13 (191,443.30) 5,036,058.13 (191,443.30) 57,375.24 (18,732.37) 5,902.44 274,007.14 13,081.98 (548 22,089.25 (4,479.50) ELECTRIC OPERATION AND MAINTENANCE EXPENSES (Continued) Line No. 1 2 3 5 6 7 8 9 10 I1 12 13 14 15 16 17 18 19 20 21 22 23 2,1 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 Account (a) DISTRIBUTION EXPENSES (Continued) 586 Meter expenses 587 Customer installations expenses 588 Miscellaneous distribution expenses 589 Rents Total Operation Maintenance 590 Maintenance supervision and engineering 591 Maintenance of structures 592 Maintenance of station equipment 593 Maintenance of overhead lines 594 Maintenance of underground lines 595 Maintenance of line transformers 596 Maintenance of street lighting and signal systems 597 Maintenance of meters 598 Maintenance of miscellaneous distribution plant Total maintenance Total distribution expenses CUSTOMER ACCOUNTS EXPENSE Operations 901 Supervision 902 Meter reading expenses 903 Customer records and collection expenses 904 Uncollectible accounts 908 Customer Service and Informational expenses Total customer accounts expenses SALES EXPENSES Operations 911 Supervision 912 Demonstrating and selling expenses 913 Advertising expenses 914 Revenues from merchandising, jobbing and contract work 915 Cost and expenses of merchandising, jobbing and contract work 916 Miscellaneous sales expenses Total sales expenses ADMINISTRATIVE AND GENERAL EXPENSES Operations 920 Administrative and general salaries 921 Office supplies and expenses 922 Administrative expenses transferred - Cr 923 Outside services employed 924 Property insurance 925 Injuries and damages 926 Employee pensions and benefits 927 Franchise requirements 928 Regulatory commission expenses 929 Duplicate Charges - Cr 930 Miscellaneous general expenses 931 Rents Total administrative & general Maintenance 935 Maintenance of general plant Total administrative and general expenses Total Electric Operation and Maintenance Expenses Increase or decrease from preceding year Amount for year (b) $ $ 30,803.45 10,767.24 63,204.50 11,838.32 (3,936.98) 6,453.79 455,141.99 12,684.13 50,661.54 (13,764.28) 1,800.79 268,827.88 3,917.24 2,975.53 5,470.22 7,631.29 (16,016.50) 109,745.18 983.35 (9,589.67) 1,584.95 (2,765.55) 341,284.49 796,426.48 70,177.48 82,861.61 139,361.12 161,194.68 5,500.00 55,697.43 361,753.23 23,576.12 1,502.75 5,500.00 12,010.69 42,589.56 (73.00) (73.00) 457,680.74 35,169.25 (35,977.84) 4,391.37 48,014.69 2,329.84 53,434.04 (11,651.16) 276,873.44 (22,281.98) 871,172.16 (63,189.77) 64,240.08 935,412.24 7,129,577.08 3,194.79 (59,994.98) (125,987.11) ELECTRIC OPERATION AND MAINTENANCE EXPENSES (Continued) SUMMARY OF ELECTRIC OPERATION AND MAINTENANCE EXPENSES Line No. 1 2 3 4 5 6 7 8 11 12 13 14 Functional Classification (a) Power Production Expenses Electric Generation: Steam power Nuclear power Hydraulic power Other power Other power supply expenses Total power production expenses Transmission Expenses Distribution Expenses Customer Accounts Expenses Sales Expense Adm. and General Expenses Total Electric Operation and Maintenance Expenses Operation (b) Maintenance (c) Total $ 5,036,058 5,036,058 5,036,058 5,036,058 455,142 361,753 (73) 871,172 6,724,052 341,284 64,240 405,525 796,426 361,753 (73) 935,412 7,129,577 NUMBER OF ELECTRIC DEPARTMENT EMPLOYEES Number of electric department employees, payroll period ending 1. Total regular full-time employees 2. Total part-time and temporary employees 3. Total employees The data on number of employees should be reported for the payroll period ending nearest to October 31, or any payroll period ending 60 days before or after October 31. If the respondent’s payrolls for the reported period include any special construction forces include such employees as parttime and temporary employees and show the number of such 31-Dec-16 17 0 17 special construction employees so included. The number of employees assignable to the electric department from joint functions of combination utilities may be determined by estimate, on the basis of employee equivalents. Show the estimated number of equivalent employees attributed to the electric department from joint functions. DISTRIBUTION OF SYSTEM LOAD IN SERVICE AREA 1. Information is desired regarding the distribution ofthe system load within the territory served by the system. This information should be furnished on the basis used by respondent in maintaining load distribution data. such as by primary substations, operating divisions, communities, metropolitan areas. or other areas. 2. A sketch map showing the location and the approximate boundary of each of these areas. together with identi?cation symbols, should be furnished. Annual Energy Provided for the Area Estimated Distribution - Percent Public Designation of Area Actual or Estimated (Primary substation, Streets and Other Sales Peak Demand of operating division, or Map Total Residential Commercial Industrial Highway to Public Irrigation Company Unaccounted Area During the Date of community) Symbol (kilowatt-hours Sales Lighting Authority Sales Use for Year (Kilowatts) Peak Annual Load Cuchillo/Caballo 40,103,432 55.15% 30.00% 3.94% 0.50% 0.00% 1.64% 0.25% 8.52% 10,921 7/14 Hot Springs 24,473,385 0% 0% 0% 0% 100% 0% 0% 0% 8,048 6/18 Frontier 2,045,140 0% 0% 100% 0% 0% 0% 0% 0% 700 112 Total 66,621,957 Factor 63% 44% 61% CONSTRUCTION OVERHEAD - ELECTRIC no overhead apportionments are made, but rather should explain on the lower section of this schedule that only such engineenng, supervisior, and administrative costs, etc, which are directly chargeable construction are charged to construclion if this is the case Engineering, supervision, administrative, and interest costs, etc, which are first assigned to a blanket work order and then prorated to constructton jobs shall be considered overheads for the purposes of formulating a response to this schedule 1 Report below the information called for concerning construction overheads for the year 2 List in column ( a ) the kinds of overheads according to the titles used by the respondent. Charges for outside professional services for engineering fees and management of supervision fees capitalized should be shown as separate items 3 On the lower section of this schedule furnish the requested explanatory informanon concerning construction overheads 4 A respondent should not report "none" to this schedule if Line No 4 5 6 7 9 10 Total overheads cleared Name of Overhead Cost of construction to which overheads were charged (exclusive of overhead charges) to construction (a) CLEARING:PROPERTY TAX ~D LABOR TRANS PAYROLL TAXES LD VACATION & SICK SPREADING LS BENE LABOR TRANS LSFASB LABOR TRANS LS WC LABOR TRANS TRANSPORTATION STORES Percent overheads to construction cost 9,420.26 18,678.54 10,933.76 18,127.68 75.934.11 3,914.88 6,830.01 57,206.66 10,076.25 3.03% 38.15% 3.51% 5.83°/ 24.41% 1.26% 2.20o/ 18.39% 3.24% 14 TOTAL $ I For each construction overhead for electric plant explain ( a ) nature of the engineering, supervisory, or administrative work, etc, the overhead charges are intended to cover ( b ) the general ~rocedure for determining the amount capitalized ( c ) the method of distribution to construction jobs ( d ) percentages applied to different types of construction ( e ) basis if differentiation in percentages for different types of construction, and (f) amounts capitalized for each overhead for the year for which this report is submitted 311,122.15 $ 147,891.98 100.00% 2 In addition to other in formation concerning engineering and superintendence or other such overheads, explain whether the amounts treated as overheads include all engineering and superintendence costs or only such por0ons as are not directly chargeable to specific jobs 3 For interest during onstruction state the interest rate used, the basic charges to which applied, in adddion to the amounts capitalized for the year for which this report is submitted ELECTRIC DISTRIBUTION METERS AND LINE TRANSFORMERS meters or line transformers are held under a lease, give name of lesser, date and period of lease and annual rent. If500 or more meters or line transformers are held other than by reason of sole ownership or lease, give name of co-owner or other party, explain basis of accounting tbr expenses between the parties, and state amounts and accounts affected in respondent’s books of account. Specify in each case whether lesser, co-owner or other party is an associate company 1. Report below the intbrmation called for concerning distribution watt-hour meters and transformers. 2. Watt-hour demand distribution meters should be included below but external demand meters should not be included. 3. Show in a footnote the number of distribution watt-hour meters or line transformers held by the respondent under lease from others, jointly owned with others, or held otherwise than by reason of sole ownership by the respondent, lf500 or more LINE TRANSFORMERS Line No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Item (a) Number at beginning of year Additions during year: Purchases Associated with utility plant acquired Total additions Reductions during year: Retirements Associated with utility plant sold Total reductions Number at end of year In stock Locked meters on customers’ premises lnactive transformers on system In customers’ use In company’s use Total end of year (as above) Number of watt-hour meters Number (b) (c) 4,280 Total capacity (kva) (d) 2,793 65,141 125 30 730 125 30 730 132 34 722 132 722 65,149 70 34 2,789 126 4,191 12 4,273 61 2,593 9 2,789 4,273 6,623 1,349 57,088 89 65,149 VERIFICATION The foregoing report must be verified by the oath of the President or chief officer of the company. The oath required may be taken before any person authorized to administer an oath by the laws of the State in which the same is taken. OATH State of New Mexico ) ) County of Sierra ) Jimmy W. Capps, Jr. makes oath and says that he is the General Manager of Sierra Electric Cooperative, Inc. and that he has examined the foregoing report, that to the best of his knowledge, information, and belief, all statements of fact contained in the said report are true and the said report is a correct statement of the business and affairs of the above-named respondent in respect to each and every matter set forth therein during the period from and including January 1, 2016 to and including December 31, 2016. ya, a,~e of affia nt~/ Subs,~.bed and sworn to before me, a Notary Public in and for the State and county above named, this ~4/ day of ~,__/0.~.~ ,2017. My commission expires (Sign~ur~ of officer authorize@ administer oaths) New Mexico Jurisdictional lntk~rmation Year Ending December 31, 2015 Electric Company Name Sierra Electric Cooperative, Inc. Address: PO Box 290, Elephant Butte, NM 87935 Phone Number: (575) 744-5231 Person Completing Form: Ofelia Melendez Other Residential Customer Class 1 4,162 24,473,385 63,102,850 1,937,068 8,324,535 24,473,385 35,032 4,400 $ 1,937,068 5,479 367 $ 161,422 457 $ 0.1524 $ 0.07915 0.1319 572 3,589 Number of Customers 16,513,564 22,115,901 !KWH Sales (Thousands) 3,870,456 Gross Revenues !Avg. Annual KWH pr Customer (1) ** $ $ Avg. Monthly Bill per Customer (3) ** $ IAvg. Gross Revenue per KWH sold (4) ** $ 1,078 Directions for the completion of (1), (2), (3), (4): (1) Divide KWH sales by number of customers. (2) Divide gross revenues by number of customers. (3) Divide (2) by 12 months. (4) Divide gross revenues by KWH sales. $ 90 $ 0.1750 2,517,011 $ 28,870 6,162 Avg. Annual Bill per Customer (2) ** Totals Sales for Resale SIERRA ELECTRIC COOPERATIVE, INC. Information required by NMPRC Rule t7.3.510.12(B) TestYearEnded1213112015 Before Rate Increase (A) Revenues Total System (B) (C) 8,605,675 $ 9,084,020 8,392,826 Earnings - Net Margins Total System 613,463 $ 894,463 434,795 Return on Equity (Rate Base) Total System 779,859 $ 1,131,859 685,002 14,329,660 $ 14,337,007 16,324,724 Rate Base Total System Return on Rate Base Total System (D) Amount of Debt Total System RUS CFC $ $ $ 4.20% 7.89% 5.44% Average Cost of Debt (E) 2016 Year End After Rate Increase 14,335,463 8,341,548 5,993,915 12,038,876 $ 5,677,320 $ 6,361,557 $ 4.22% 4.68% Capital Structure Total Margins & Equity Total System $ 8,771,321 (F) Generation Plant $ $ (G) Transmission Plant $ $ (H) Distribution Plant Total System O & M Expenses Cost of Power Operation & Maintenance Customer Accounts Sales Expense Administrative & General Depreciation Other (J) Deferred Tax Reserves (K) Peak Demand (L) Net Energy Sales Total System 13,841,387 13,841,387 $ $ $ $ $ $ $ $ $ 5,228,374 $ 737,242 $ 319,164 $ $ 973,534 $ 556,50O $ 11,002 $ 7,825,816 $ 17670 65,346,693 5,319,716 737,242 319,164 1,008,534 556,500 11,002 8,997,693 $ $ 15,828,848 15,828,848 $ $ $ $ $ $ $ 5,036,058 796,426 361,753 935,339 573,424 4,825 17337 63,102,850 According to the Paperwork Reduction Act of 1995, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid OMB control number. The valid OMB control number for this information collection is 0572-0032. The time required to complete this information collection is estimated to average 15 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. UNITED STATES DEPARTMENT OF AGRICULTURE BORROWER DESIGNATION N~0 0 17 RURAL UTILITIES SERVICE PERIOD ENDEDDecember, 2016 FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION (Prepared with Audited Data) BORROWER NAME Sierra Electric Cooperative, Inc. INSTRUCTIONS - See help in the online application. ]’his information is analyzed and used to determine the submitter’s financial situation and feasibility for loans and guarantees. You are required by contract and applicable regulations to provide the information. The information provided is subject to the Freedom of Information Act (5 US.C. 552) CERTIFICATION We recognize that statements contained herein concern a matter within the jurisdiction of an agency of the United States and the making of a false, fictitious or fraudulent statement may render the maker subject to prosecution under Title 18, United States Code Section 1001. We hereby certifiy that the entries in this report are in accordance with the accounts and other records of the system and reflect the status of the system to the best of our knowledge and belief. ALL INSURANCE REQUIRED BY PART 1788 OF 7 CFR CHAPTER XVII, RUS, WAS IN FORCE DURING THE REPORTING PERIOD AND RENEWALS HAVE BEEN OBTAINED FOR ALL POLICIES DURING THE PERIOD COVERED BY THIS REPORT PURSUANT TO PART 1718 OF 7 CFR CHAPTER XVI1 (check one of the following) [] All of the obligations under the RUS Joan documents have been fulfilled in all material respects. Jimmy Capps There has been a default in the fulfillment of the obligations under the RUS loan documents. Said default(s) is/are specifically described in Part D of this report. 3/28/2017 DATE ITEM 2. 3. 4. 5. 6 7. 8. 9. 10. 11, 12. 13. 14. 15. 16. 17. ! 8. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. PART A. STATEMENT OF OPERATIONS YEAR-TO-DATE LAST YEAR THIS YEAR Operating Revenue and Patronage Capital Power Production Expense Cost of Purchased Power Transmission Expense Regional Market Expense Distribution Expense- Operation Distribution Expense- Maintenance Customer Accounts Expense Customer Service and Informational Expense Sales Expense Administrative and General Expense Total Operation & Maintenance Expense (2 thru !1) Depreciation and Amortization Expense Tax Expense - Property & Gross Receipts Tax Expense - Other Interest on Long-Term Debt Interest Charged to Construction - Credit Interest Expense - Other Other Deductions Total Cost of Electric Service (12 thru 19) Patronage Capital & Operating Margins (1 minus 20) Non Operating Margins - Interest Allowance for Funds Used During Construction Income (Loss) from Equity Investments Non Operating Margins - Other Generation and Transmission Capital Credits Other Capital Credits and Patronage Dividends Extraordinary Items Patronage Capital or Margins (21 thru 28) RUS Financial and Operating Report Electric Distribution BUDGET THIS MONTH 8,605,675 8,392,826 8,555,616 666,497 5,227,501 5,036,058 5,018,811 397,336 466,135 271,i07 275,477 455,142 341,284 306,056 55,697 (73) 935,412 7,129,576 573,424 521,074 319,843 294,398 50,169 34,566 12,631 25,302 6,573 935,021 7,139,316 589,757 558,685 48,224 43,687 0 995,407 7,279,314 556,500 82,277 561,099 599,490 930 10,945 8,408,788 196,887 129,525 974 3,851 8,307,315 85,511 134,763 1,020 6,843 8,356,007 199,609 126,735 73 200 659,596 (22,121) 241,186 46,113 7,833 156,833 49,853 6,000 0 0 801 147,664 5,793 5’91,590 434,793 619,071 52,414 6,901 12,512 332,344 173,671 Revision Date 2014 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE BORROWER DESIGNATION N/40017 FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION PERIOD ENDED December, 2016 INSTRUCTIONS - See help in the online application. ITEM PART B. DATA ON TRANSMISSION AND DISTRIBUTION PLANT YEAR-TO-DATE ITEM LAST YEAR THIS YEAR 1. New Services Connected 32 2. Services Retired 14 3. Total Services in Place 4,767 4. Idle Services (Exclude Seasonals) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 626 ASSETS AND OTHER DEBITS Total Utility Plant in Service Construction Work in Pro[~ress Total Utilit~ Plant (l + 2) Accum. Provision for Depreciation and Amort Net Utility Plant (3 - 4) Non-Utility Property (Net) Investments in Subsidiar~ Companies Invest. in Assoc. Orig. - Patrona[~e Capital Invest. in Assoc. Or~;. - Other - General Funds Invest. in Assoc. Org. - Other - Non~eneral Funds Investments in Economic Development Projects Other Investments Special Funds Total Other Property & Investments (6 thru 13) Cash - General Funds 25 5. Miles Transmission 6. Miles DistributionII Overhead 7. Miles Distribution4,783 Underground 8. Total Miles Energized 614 (5+6+7) PART C. BALANCE SHEET 2{3,651,~28 2,406,757 23,058,285 7,229,437 15,828,848 30 31. 32. 33. 34. 0 35. 0 ! 36. 3,229,700 37. 0 [ 38. 39 232,133 o 40. 578,397 41. 0 42. 4,04 o, 23 o 43. 101,350 44. 2OO 45. 16. Cash - Construction Funds - Trustee 17. 18. 19. 20. 21. 22. Special Deposits Temporary Investments Notes Receivable (Net) Accounts Receivable - Sales of Energy (Net) Accounts Receivable - Other {Net) Renewable Ener~;y Credits 106, 6881 46. 950,000 47. 0 48. 628,367 49. 10,968 0 50. 23. Materials and Supplies - Electric & Other 160,845 24. 25. Prepayments Other Current and Accrued Assets Total Current and Accrued Assets (15 thru 25) Re[~ulator~ Assets Other Deferred Debits Total Assets and Other Debits (5+14+26 thru 28) 26. 27. 28. 29. RUS Financial and Operating Report Electric Distribution YEAR-TO-DATE THIS YEAR LAST YEAR (a) (b) 73,961 3,606 2,035,985 454,344 101,330 22,460,737 829.59 829.80 68.82 69.24 898.41 899.04 LIABILITIES AND OTHER CREDITS Memberships Patrona~;e Capital Operating, Mar~ins - Prior Years Operating Margins - Current Year Non-Operating Margins Other Mar[~ins and Equities Total Margins & Equities (30 thru 35) Lon~;-Term Debt- RUS (Net! Lon~;-Term Debt - FFB - RUS Guaranteed Lone-Term Debt- Other- RUS Guaranteed Lone-Term Debt Other (Net) Lone-Term Debt - RUS - Econ. Devel. (Net) Payments-Unapplied Total Long-Term Debt (37 thru 41 - 42) Obligations Under Capital Leases - Noncurrent Accumulated Operating Provisions and Asset Retirement Obligations Total Other Noncurrent Liabilities (44 + 45) Notes Payable Accounts Payable 0 8,519,626 85,510 349,283 43,273 8,997,692 4,987,552 3,187,650 0 5,612,758 0 2,152,620 Ii,635,340 0 444,40C 444,400 C 428,699 165,224 Consumers Deposits Current Maturities Lon[~-Term Debt Current Maturities Long-Term Debt 51. - Economic Development 52. Current Maturities Capital Leases 53. Other Current and Accrued Liabilities Total Current & Accrued Liabilities 54. (47 thru 53) 55. Regulatory Liabilities 56. Other Deferred Credits Total Liabilities and Other Credits 57. (36 +43 +46 +54 thru 56) 547,503 199,48S 1,340,915 42,390 22,460,737 Revision Date 2014 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION INSTRUCTIONS - See help in the online application. BORROWER DESIGNATION NM0017 PERIOD ENDED December, 2016 PART D. NOTES TO FINANCIAL STATEMENTS RUS Financial and Operating Report Electric Distribution Revision Date 2014 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION INSTRUCTIONS - See help in the online application. BORROWER DESIGNATION NM0017 PERIOD ENDED December, 2016 PART D. CERTIFICATION LOAN DEFAULT NOTES RUS Financial and Operating Report Electric Distribution Revision Date 2014 BORROWER DESIGNATION l’,rM 0 017 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE t FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION PER1ODENDED December, 2016 INSTRUCTIONS - See help in the online application. PART E. CHANGES IN UTILITY PLANT BALANCE RETIREMENTS BEGINNING OF YEAR ADDITIONS PLANT ITEM 1. 2. 3. ~. 5. 5. Distribution Plant General Plant Headquarters Plant Intangibles 18,249,719 1,408,674 627, 118 ADJUSTMENTS AND TRANSFERS 18,561,431 137,416 449, 128 66, 905 20,630 1,442,349 647,748 0 0 33,230 0 Transmission Plant Regional Transmission and Market Operation Plant All Other Utility Plant Total Utility Plant in Service (1 thru 7) Construction Work in Progress 10. Total Utility Plant (8 + 9) 0 20,651,528 2,406,757 23,058,285 0 20,285,511 520,325 536,663 1,886,432 170,646 20,805,836 2,423,095 170,646 BALANCE END OF YEAR PART F. MATERIALS AND SUPPLIES BALANCE BEGINNING OF YEAR ITEM Electric Other PURCHASED 136,871 0 SALVAGED 136,128 USED (NET) 4,021 BALANCE END OF YEAR SOLD 117,657 159,259 1,585 1,585 PART G. SERVICE INTERRUPTIONS ITEM POWER SUPPLIER AVERAGE MINUTES PER CONSUMER BY CAUSE MAJOR EVENT PLANNED 311.398 Present Year Five-Year Average 186 . 038 0.000 0. 000 9.257 PART H. EMPLOYEE-HOUR AND PAYROLL STATISTICS 29,090 Payroll - Capitalized Payroll - Other 1,072 PART 1. PATRONAGE CAPITAL DESCRIPTION ITEM Capital Credits - Received a. General Retirements b. Special Retirements r. Total Retirements (a + b) Cash Received From Retirement of Patronage Capital by Suppliers of Electric Power b. Cash Received From Retirement of Patronage Capital by Lenders for Credit Extended to the Electric System c. 1. Amount Due Over 60 Days 337.478 143.522 665. 774 338.817 615,096 Number of Full Time Employees Employee - Hours Worked - Regular Time Employee - Hours Worked - Overtime 1. Capital Credits - Distributions 16.898 TOTAL ALL OTHER Total Cash Received (a + b) PART J. DUE FROM CONSUMERS FOR ELECTRIC SERVICE 18,391 12. Amount Written Off Durin~ Year ENERGY EFFICIENCY AND CONSERVATION LOAN PROGRAM Anticipated Loan Default % Actual Loan Default % lii Tota! Loan Default Dollars YTD 1. Anticipated Loan Delinquency % 2. Actual Loan Delinquency % 3. Total Loan Delinquency Dollars YTD RUS Financial and Operating Report Electric Distribution 137,186 128,418 THIS YEAR CUMULATIVE 222,463 2,289 224,752 1,613,968 1,613,968 0 13,131 13,131 12,267 Revision Date 2014 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE BORROWER DESIGNATION NM00 ! 7 FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION INSTRUCTIONS - See help in the online application No ITEM l Tri-State G & T Assn~ Inc (CO0047) 2 *Residential Renewable Supplier 3 *Commercial Renewable Supplier Total SUPPLIER CODE PERIOD ENDED December, 2016 PART K. kWh PURCHASED AND TOTAL COST TOTAL RENEWABLE RENEWABLE kWh COST ENERGY FUEL PURCHASED PROGRAM TYPE NAME 30151 700200 Net Metering 700100 Net Metering RUS Financial and Operating Report Electric Distribution Solarphotvoltaic Solar photvoltaic AVERAGE COST (Cents/kWh) INCLUDED IN INCLUDED IN TOTAL COST - TOTAL COST FUEL COST WHEELING ADJUSTMENT AND OTHER CHARGES 66,621,957 5,036,708 7.56 35,077 1,487 4.24 9,060 382 4.22 66,666,094 5,038,577 7.56 Revision Date 2014 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE BORROWER DESIGNATION FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION INSTRUCTIONS - See help in the online application NM0017 PERIOD ENDED December, 2016 PART K. kWh PURCHASED AND TOTAL COST Comments No ! 2 3 RUS Financial and Operating Report Electric Distribution Revision Date 2014 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION INSTRUCTIONS - See help in the online application. BORROWER DESIGNATION NM0017 PERIOD ENDED December, 2016 PART L. LONG-TERM LEASES NAME OF LESSOR TYPE OFPROPERTY RENTAL THIS YEAR TOTAL RUS Financial and Operating Report Electric Distribution Revision Date 2014 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE BORROWER DESIGNATION FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION I’D,I 0 017 PERIOD ENDED December, 2016 ’iNSTRUCTIONS - See help in the online application. 1. Date of Last Annual Meeting PART M. ANNUAL’ MEETING AND BOARD DATA 2. Total Number of Members 3. Number of Members Present at Meeting 4/4/2016 3, 154 5. Number of Members Voting by Proxy or Mail 6. Total Number of Board Members I RUS Financial and Operating Report Electric Distribution 284 7. Total Amount of Fees and Expenses for Board Members 9 4. Was Quorum Present? $ Y 8. Does Manager Have Written Contract? 139,240 Revision Date 2014 N BORROWER DESIGNATION UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE NM0017 FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION INSTRUCTIONS - See help in the online application. PERIOD ENDED December, 2016 PART Nr LONG-TERM DEBT AND DEBT SERVICE REQUIREMENTS No ITEM BALANCE END OF YEAR 1 Rural Utilities Service (Excludes RUS Economic Development Loans) 2 National Rural Utilities Cooperative Finance Corporation 3 CoBank1 ACB 4 Federal Financin/~ Bank 5 RUS - Economic Development Loans 6 Payments Unapplied 7 Principal Payments Received from Ultimate Recipients of IRP Loans 8 Principal Payments Received from Ultimate Recipients of REDL Loans 9 Principal Payments Received from Ultimate Recipients of EE Loans TOTAL RUS Financial and Operating Report Electric Distribution INTEREST (Billed This Year) TOTAL (Billed This Year) 96,768 352,716 285,649’ 367,641 653,290 57~893 39~004 96~897 4,987,552 255,948 5,612,758 11,635,340 PRINCIPAL (Billed This Year) 599,490 503~413 Revision Date 2014 1,102,903 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION BORROWER DESIGNATION NM0017 PERIOD ENDED December, 2016 INSTRUCTIONS - See help in the online application. PART O. POWER REQUIREMENTS DATABASE - ANNUAL SUMMARY AVERAGENO. CONSUMER SALES & CONSUMERSSERVED DECEMBER CLASSIFICATION REVENUE DATA Residential Sales (excluding seasonal) 2. Residential Sales- Seasonal Irrigation Sales 4. Comm. and Ind. 1000 KVA or Less 5. Comm. and Ind. Over 1000 KVA 6. Public Street & Highway Lighting 7. Other Sales to Public Authorities 8. Sales for Resale - RUS Borrowers Sales for Resale - Other 10. ! 1. 12. 13. 14. 15. 16. 17. 18. 19. 20. 3,592 TOTAL YEAR TO DATE 3,579 a. No. Consumers Served b. kWh Sold c. Revenue a. No. Consumers Served b kWh Sold c. Revenue a. No. Consumers Served b. kWh Sold c. Revenue a. No. Consumers Served b. kWh Sold 13,609,545 c. Revenue 2,126,778 a. b. c. No. Consumers Served kWh Sold Revenue 2,045,140 203,070 a. No. Consumers Served b. kWh Sold c. Revenue a. No. Consumers Served b. kWh Sold c. Revenue a. No. Consumers Served b. kWh Sold c. Revenue a. No. Consumers Served b. c. kWh Sold Revenue Total No. of Consumers (lines la thru Total kwh Sold (lines lb thtu Total Revenue Received From Sales of Electric Energy (lines lc thru 9c), Transmission Revenue Other Electric Revenue kwh - Own Use Total kWh Purchased Total kWh Generated Cost of Purchases and Generation Interchange - kWh - Net Peak - Sum All kW Input (Metered) Non-coincident__ Coincident X RUS Financial and Operating Report Electric Distribution 22,115,901 3,880,089 151 152 659,438 136,326 415 250 418 245 199,441 56,595 24,473,385 1,937,068 4,410 4,396 63,102, 850 8,339,926 52,900 91,452 66,621,957 5,036,058 17,337 Revision Date 2014 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE BORROWER DESIGNATION FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION PERIOD ENDED NM0017 December, 2016 INSTRUCTIONS - See help in the online application. PART P. ENERGY EFFICIENCY PROGRAMS ADDED THIS YEAR CLASSIFICATION No. of Consumers Residential Sales (excluding seasonal) 2. 3. 4. 5. 6. 7. 8. 9, 10. Residential Sales - Seasonal Irrigation Sales Comm. and Ind. 1000 KVA or Less Comm. and Ind. Over 1000 KVA Public Street and Highway Lighting Other Sales to Public Authorities Sales for Resale - RUS Borrowers Sales for Resale - Other Total RUS Financial and Operating Report Electric Distribution 23 Amount Invested 1,450 Estimated MMBTU Savings 36 TOTAL TO DATE No. of Consumers 364 Estimated MMBTU Savings Invested 53, 994 I, 569 144 23 1,450 36 365 54,138 1,576 Revision Date 2014 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE BORROWER DESIGNATION NM0017 FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION INVESTMENTS, LOAN GUARANTEES AND LOANS PERIOD ENDED December, 2016 INSTRUCTIONS - Reporting of investments is required by 7 CFR 1717, Subpart N. Investment categories reported on this Part correspond to Balance Sheet items in Part C. Identify all investments in Rural Development with an ’X’ in column (e). Both ’Included’ and ’Excluded’ Investments must be reported. See help in the online application. PART Q. SECTION I, INVESTMENTS ISee Instructions for definitions of Income or Loss) RURAL No DESCRIPTION INCLUDED EXCLUDED INCOME OR LOSS DEVELOPMENT ($) ($) ($) (b) (c) (d) Investments in Associated Organizations NRUCFC 951017 NRUCFC 140,781 OTHER INVESTMENT 10~534 F EDERATED 58;963 ~TR1-STATE 3~134~683 NISC 21~855 Total s 91~352 3~370;481 [ i Other Investments EDWARD JONES 578~3981 Totals 578~398 Cash - General BANK OF THE SOUTHWEST-G FUND 64~340 BANK OF THE SOUTHWEST - INTEREST BEARING 36~710 WORKING FUND 300 Totals 101;050 300 Special Deposits FIRST SAVING BANK 106r688 Totals 106~688 Temporary, Investments TEMPORARY CASH INVESTMENTS 9501000 Totals 950;000 Accounts and Notes Receivable - NET ACCOUNTS RECEIVABLE - MISCELLANEOUS (104) ACCOUNTS RECEIVABLE - POLE ATTACHMENTS 11~072 Totals 10~968 TOTAL INVESTMENTS (1 thru 1,260,058 3,949,179 RUS Financial and Operating Report Electric Distribution - Investments Revision Date 2014 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE BORROWER DESIGNATION NM0017 FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION INVESTMENTS, LOAN GUARANTEES AND LOANS PERIOD ENDED December, 2016 INSTRUCTIONS - Reporting of investments is required by 7 CFR 1717, Subpart N. Investment categories reported on this Part correspond to Balance Sheet items in Part C. Identify all investments in Rural Development with an ’X’ in column (e), Both ’Included’ and ’Excluded’ Investments must be reported. See help in the online application. PART Q. SECTION I1. LOAN GUARANTEES No ORGANIZATION MATURITY DATE ORIGINAL AMOUNT LOAN BALANCE RURAL DEVELOPMENT ($) ($) Ib) ~) TOTAL TOTAL (Included Loan Guarantees Only) RUS Financial and Operating Report Electric Distribution - Loan Guarantees Revision Date 2014 UNITED STATES DEPARTMENT OF AGRICULTURE RURAL UTILITIES SERVICE BORROWER DESIGNATION NM0017 FINANCIAL AND OPERATING REPORT ELECTRIC DISTRIBUTION INVESTMENTS, LOAN GUARANTEES AND LOANS PERIOD ENDED December, 2016 INSTRUCTIONS - Reporting of investments is required by 7 CFR 1717, Subpart N Investment categories reported on this Part correspond to Balance Sheet items in Part C. Identify all investments in Rural Development with an ’X’ in column (e). Both ’Included’ and ’Excluded’ Investments must be reported. See help in the online ap, plication. SECTION Ill. RATIO RATIO OF INVESTMENTS AND LOAN GUARANTEES TO UTILITY PLANT [Total of Included Investments (Section I, 1 l b) and Loan Guarantees - Loan Balance (Section 1I, 5d) to Total Utility Plant (Line 3, Part C) of this report] ORGANIZATION SECTION IV. LOANS MATURITY DATE ORIGINAL AMOUNT (b) ($) LOAN BALANCE 5.46 % RURAL DEVELOPMENT (c) Employee% Officers~ Directors Energy Resources Conservation Loans TOTAL RUS Financial and Operating Report Electric Distribution - Loans Revision Date 2014 NEW MEXICO 17 SIERRA SIERRA ELECTRIC COOPERATIVE, INC. ELEPHANT BUTTE, NEW MEXICO FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 AND REPORT OF CERTIFIED PUBLIC ACCOUNTANTS BOIANGER, SE(;AR~’,;, GILBERT & MO~, L.L.P. CERTIFIED PUBLIC ACCrlUNTANTB LI~BBO(’K, TEXAS BOLIN(;ER, SE(;ARS, GILBERT ~ ~[()SS, L.L.P. LI’BIIO(’K, TEXAS 79423-1,[954 February 21, 2017 Board of Trustees Sierra Electric Cooperative, Inc. Elephant Butte, New Mexico We have audited the financial statements of Sierra Electric Cooperative, Inc. (the Cooperative) for the year ended December 31, 2016, and have issued our report thereon dated February 21, 2017. Professional standards require that we provide you with the following information related to our audit. Our Responsibility under U.S. Generally Accepted Auditin.q Standards As stated in our engagement letter dated June 20, 2016, 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 Sierra 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. Other Information in Documents Containinq Audited Financial Statements Our responsibility for other information in documents containing the entity’s financial statements and report does not extend beyond the financial information identified in the report, in addition we do not have an obligation to perform any procedures to corroborate other information contained in these documents. Planned Scope and Timinq 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. Si.qnificant Audit Findinqs 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 Sierra Electric Cooperative, Inc. are described in the notes to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during the year ended December 31, Board of Trustees Sierra Electric Cooperative, Inc. February 21, 2017 Page 2 2016. 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. 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. Difficulties Encountered in Performing the Audit We encountered no 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. Disa,qreements with Mana,qement 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. Manaqement Representations We have requested certain representations from management that are included in the management representation letter dated February 21,2017. 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 contact us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Board of Trustees Sierra Electric Cooperative, Inc. February 21,2017 Page 3 Other Audit Findinqs 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 the Board of Trustees and management of Sierra 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 NEW MEXICO 17 SIERRA SIERRA ELECTRIC COOPERATIVE, INC. ELEPHANT BUTTE, NEW MEXICO FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 AND REPORT OF CERTIFIED PUBLIC ACCOUNTANTS NEW MEXICO 17 SIERRA SIERRA ELECTRIC COOPERATIVE, INC. ELEPHANT BUTTE, NEW MEXICO FINANCIAL STATEMENTS WITH ACCOMPANYING INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 TABLE OF CONTENTS Statement Identification Page No. Independent Auditor’s Report Financial Statements 41111 Balance Sheets Exhibit A 3 Statements of Income, Comprehensive Income and Patronage Capital Exhibit B 4 Statements of Cash Flows Exhibit C 5 6 Notes to Financial Statements Accompanying Information Electric Plant Schedule 1 17 Accumulated Provision for Depreciation Schedule 2 18 Other Property and Investments Schedule 3 19 Patronage Capital Schedule 4 20 RUS, FFB and CFC Mortgage Notes Schedule 5 21 Administrative and General Expenses Schedule 6 22 Five Year Comparative Data Schedule 7 23 Compliance and Internal Control Section Report on Compliance with Aspects of Contractual Agreements and Regulatory Requirements for Electric Borrowers 24 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Financial Statements Performed in Accordance with Government Auditing Standards 26 LUBBOCK, TEXAS 79423-1954 Independent Auditor’s Report Board of Trustees Sierra Electric Cooperative, Inc. Elephant Butte, New Mexico Report on the Financial Statements We have audited the accompanying financial statements of Sierra Electric Cooperative, Inc. (the Cooperative), which comprise of the balance sheets as of December 31, 2016 and 2015, and the related statements of income, comprehensive income and patronage capital and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibifity 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 and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. 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- -2Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sierra Electric Cooperative, Inc. as of December 31, 2016 and 2015, 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. Other Matters Accompanying Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The schedules of electric plant, accumulated provision for depreciation, other property and investments, patronage capital, RUS, FFB and CFC mortgage notes, administrative and general expenses, and five year comparative data 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. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated February 21, 2017, on our consideration of Sierra Electric Cooperative, Inc.’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the 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 Sierra Electric Cooperative, Inc.’s internal control over financial reporting and compliance. Certified Public Accountants Lubbock, TX February 21, 2017 -3SIERRA ELECTRIC COOPERATIVE, INC. Exhibit A BALANCE SHEETS DECEMBER 31, 2016 AND 2015 ASSETS December 31, 2016 2015 UTILITY PLANT AT COST Electric Plant in Service Construction Work in Progress $ 20,651,528 $ Less: Accumulated Provision for Depreciation $ OTHER PROPERTY AND INVESTMENTS Investments in Associated Organizations Investments Classified as Available-for-Sale $ $ CURRENT ASSETS Cash - General Temporary Cash Investments Investments Classified as Available-for-Sale Accounts Receivable (Less allowance for uncollectibles of $21,347 in 2016 and $21,537 in 2015) Power Cost Adjustment Underbilled Materials and Supplies Other Current Assets DEFERRED CHARGES TOTAL ASSETS 2,406,757 23,058,285 7,229,437 15,828,848 3,461,833 565,092 4,026,925 $ 208,237 950,000 13,306 $ 20,285,511 520,325 $ 20,805,836 6,964,449 $ 13,841,387 $ $ $ 3,275,767 556,007 3,831,774 270,864 750,000 15,311 $ 639,646 1,269 160,845 75,986 2,049,289 654,449 $ 136,873 80,170 1,907,667 $ 555,675 $ 551,184 $ 22,460,737 $ 20,132,012 EQUITIES AND LIABILITIES EQUITIES Patronage Capital Other Equities Accumulated Other Comprehensive Loss Other Comprehensive Income o Post-Retirement Benefits LONG-TERM DEBT RUS Mortgage Notes Less Current Maturities FFB Mortgage Notes Less Current Maturities CFC Mortgage Notes Less Current Maturities RUS Advance Payments ACCUMULATED PROVISION FOR PENSIONS AND BENEFITS Accumulated Provision of Other Post-Retirement Benefits $ 4,987,553 3,187,650 5,612,758 (2,152,620) 11,635,341 $ $ CURRENT LIABILITIES Current Maturities of Long-Term Debt Accounts Payable - Purchased Power Accounts Payable - Other Power Cost Adjustment Overbilled Consumer Deposits Accrued Employee Compensated Absences Accrued Taxes Other Current and Accrued Liabilities 444,400 547,503 397,336 31,360 $ TOTAL EQUITIES AND LIABILITIES 8,954,421 6,978 (18,705) 55,000 8,997,694 165,224 97,558 123,780 20,541 1,383,302 $ 8,744,377 6,841 (19,497) 39,600 8,771,321 5,089,321 490,208 5,993,949 (2,048,270) $ 9,525,208 $ 477,400 465,400 429,395 56,003 14,124 177,300 89,073 105,788 21,000 1,358,083 $ 22,460,737 $ 20,132,012 The accompanying notes are an integral part of these financial statements. SIERRA ELECTRIC COOPERATIVE, INC. Exhibit B STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND PATRONAGE CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 Years Ended December 31, 2016 2015 Amount % Amount OPERATING REVENUES Residential Irrigation Commercial and Industrial Power Cost Adjustment Sales for Resale Other Operating Revenues Total Operating Revenues 3,870,456 135,988 2,381,023 15,393 1,937,068 52,898 8,392,826 46.1 1.6 28.4 0.2 23.1 0.6 100.0 OPERATING EXPENSES Purchased Power Distribution - Operation Distribution - Maintenance Customer Accounts Administrative and General Depreciation and Amortization Other Interest Other Deductions Total Operating Expenses 5,036,058 455,142 341,284 361,679 935,412 573,424 974 3,851 7,707,824 60.0 5.4 4.1 4.3 11.1 6.8 0.0 0.0 91.7 $ 685,002 8.3 $ 599,490 7.1 85,512 1.2 156,833 49,853 1.9 0.6 292,198 3.7 134,764 OPERATING MARGINS - Before Fixed Charges FIXED CHARGES Interest on Long-Term Debt OPERATING MARGINS - After Fixed Charges G & T Capital Credits Other Capital Credits NET OPERATING MARGINS NONOPERATING MARGINS Interest Loss on Sale of Available-for-Sale Securities Other Nonoperating income NET MARGINS $ $ 3,914,694 156,672 2,449,682 (39,904) 2,068,521 56,010 $ 8,605,675 5,227,501 466,135 271,107 319,164 995,407 556,500 930 10,945 $ 7,847,689 60.7 5.4 3.2 3.7 11.6 6.5 0.0 0.1 91.2 $ (44,238) (20,684) (68,659) 55,297 (131,453) (3,112/ $ (212,849) (191,443) (10,993) 70,177 42,515 (59,995) 16,924 44 (7,094) $ (139,865) 561,099 6.5 196,887 2.3 241,186 46,113 2.9 0.5 $ 484,186 5.7 $ $ 129,525 (36,923) 14,802 107,404 1.5 (0.4) 0.~2_ 1.3 $ 7,833 142,597 1.6 0.0 0.1 1.7 434,795 5.4 $ 591,590 7.0 $ (156,795) $ $ COMPREHENSIVE INCOME Adjustment for Post-Retirement Benefits Unrealized Gain on Securities 450,987 (15,400) (792) $ INCREASE IN PATRONAGE CAPITAL 434,795 $ 591,590 8,744,377 8,371,027 (224,751) (218,240) PATRONAGE CAPITAL - END OF YEAR $ 8.8 $ (72,984) 15,400 792 PATRONAGE CAPITAL RETIRED 45.5 1.8 28.5 (0.5) 24.0 0.7 100.0 757,986 OTHER COMPREHENSIVE INCOME Adjustment for Post-Retirement Benefits Unrealized Gain on Securities PATRONAGE CAPITAL - BEGINNING OF YEAR Increase (Decrease) 8,954,421 17,875 609,465 (17,875) $ 8,744,377 The accompanying notes are an integral part of these financial statements. 38,391 $ (111,375) (84,353) 3,740 (191,988) 5,239 36,923 (6,969) $ 35,193 -5SIERRA ELECTRIC COOPERATIVE, INC. Exhibit C STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 December 31, 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES Net Margins Adjustments To Reconcile Net Margins to Net Cash Provided by Operating Activities Depreciation and Amortization Capital Credits - Non-Cash Deferred Charges Accounts Receivable Power Cost Adjustment Inventories and Other Current Assets Accrual of Annual Other Post-Retirement Benefits Payables and Accrued Liabilities Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant Salvage Value of Retirement and Other Credits Plant Removal Costs Other Property and Investments Net Activity of Available-for-Sale Securities Net Cash Used in Investing Activities 434,795 $ 609,531 (188,606) (4,491) 14,803 (15,393) (19,788) (17,600) (42,761) 770,490 594,550 (271,241) 27,453 (24,574) 39,905 26,193 (25,200) (5,106) $ 953,570 $ (2,423,095) 591,590 $ (1,617,696) 22,696 (63,973) 6,217 1,077,129 $ (575,627) $ 580 (174,477) 2,540 (6,288) (2,600,740) CASH FLOWS FROM FINANCING ACTIVITIES Advances on Long-Term Debt from FFB Payments on Long-Term Debt to RUS Cushion of Credit Payments to RUS Payments on Long-Term Debt to FFB Payments on Long-Term Debt to CFC Other Equities Retirement of Patronage Capital Net Cash Provided by (Used in) Financing Activities $ 2,800,000 (96,768) (104,350) (39,004) (367,641) 137 !224,751) 1,967,623 $ (350,275) 1,330 !218,240) (257,876) INCREASE IN CASH $ 137,373 $ 120,067 500,000 (91,400) (99,291) CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR 1 ,O2O,864 900,797 CASH AND CASH EQUIVALENTS- END OF YEAR 1,158,237 $ 1 ,O20,864 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid During the Year for: Interest on Long-Term Debt Income Taxes SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES Adjustment for Post-Retirement Benefits $ $ 599,490 $ 0$ 15,400 The accompanying notes are an integral part of these financial statements. 561,098 0 -6SIERRA ELECTRIC COOPERATIVE, INC. NOTES TO FINANCIAL STATEMENTS 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Sierra 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 Tri-State Generation and Transmission Association, Inc. of which the Cooperative is a member. Any revenues earned in excess of costs incurred are allocated to members of the Cooperative and are reflected as patronage capital equity in the balance sheet. In the normal course of business the Cooperative recognized accounts receivable for electric energy delivered and billed. Bills to customers are considered delinquent if not paid within 20 calendar days from the date of the bill. If the bill is not paid within 15 days after the bill is considered delinquent, the service is subject to disconnection. A late charge is assessed if the customer’s bill is not paid by the due date. The Cooperative provides an allowance to recognize accounts receivable considered to be uncollectible. The allowance is estimated on the basis of accounts receivable outstanding for 90 days or more. The Board of Trustees reviews the delinquent accounts monthly. On an annual basis, delinquent accounts over 90 days old are charged off. The patronage capital allocated to the customer, applicable to the account charged off, is available to the Cooperative to offset the account charged off when the patronage capital is retired. System of Accounts The accounting records of the Cooperative are maintained in accordance with the Rural Utilities Service (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 the 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. This same amount, 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. Inventories Materials and supplies inventories are valued at average unit cost. -7SIERRA ELECTRIC COOPERATIVE, INC. NOTES TO FINANCIAL STATEMENTS Electric Revenues The Cooperative’s operating revenues are under the jurisdiction of the New Mexico Public Regulation Commission. The Cooperative records electric revenues as billed to customers on a monthly basis. Revenue is not accrued for power delivered but not billed at the end of each month. The Cooperative’s tariffs for electric service include a power cost recovery factor and a debt cost adjustment factor. These factors provide for the adjustment of electric rates charged to customers to reflect the changes in the cost of power and in interest costs, respectively, from the costs which were established in the test year of the Cooperative’s last rate case. In order to match power costs and interest costs and related revenues, costs to be billed in subsequent periods are recognized as accrued unbilled revenue and costs to be refunded to customers in subsequent periods are recognized as power cost or debt cost adjustments. The Cooperative provides service for resale to a major consumer - the City of Truth or Consequences, New Mexico. Revenues from this service amounted to $1,937,068 and $2,068,521 in 2016 and 2015, respectively. At December 31, 2016 and 2015, the Cooperative had delivered power for usage that had not yet been billed. It is estimated that this unbilled revenue amounted to approximately $140,570 and $163,555 as of December 31, 2016 and 2015, respectively. A new accounting pronouncement scheduled to become effective 2019 will likely result in the Cooperative recognizing the power delivered but not billed at the end of each period on the financial statements. Management is currently assessing the potential dollar impact of this new pronouncement. Group Concentrations of Credit Risk The Cooperative’s headquarters facility is located in Elephant Butte, New Mexico. The service area includes members located in Catron, Luna, Sierra, and Socorro counties. The Cooperative records a receivable for electric revenues as billed on a monthly basis. The Cooperative requires a deposit from its 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, 2016 and 2015, deposits on hand totaled $165,224 and $177,300, respectively. The cash balances of the Cooperative are maintained in institutions that are insured by the Federal Deposit Insurance Corporation. At times, the cash balance exceeded the coverage. Patronage Capital Certificates Patronage capital from associated organizations is recorded at the stated amount of the certificate. At the end of each year the Cooperative receives an estimated allocation from its G & T purchased power provider. In accordance with the USOA, the Cooperative records this estimated amount as income. Any differences between the estimated amounts and the actual final allocations are recorded in the following years. Cash and Cash Equivalents For purposes of the statements of cash flows, cash and temporary investments are cash and cash equivalents. -8SIERRA ELECTRIC COOPERATIVE, INC. NOTES TO FINANCIAL STATEMENTS Income Taxes The Cooperative is exempt from federal income taxes under Section 501(c)(12) of the Internal Revenue Code as long as 85% of its revenue is from members for the sole purpose of meeting losses and expenses. For the year ended December 31, 2016, the Cooperative qualified for exemption. Uncertain Tax Positions The Cooperative utilizes 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 its 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 2013. 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, 2016 and 2015. 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 RUS, Federal Financing Bank (FFB) and the National Rural Utilities Cooperative Finance Corporation (CFC). 3. Electric Plant The major classes of electric plant are as follows: December 31, 2016 2015 Distribution Plant General Plant $ 18,561,432 2,090,096 $ 18,249,720 2,035,791 Total Electric Plant in Service Construction Work in Progress $ 20,651,528 2,406,757 23,058,285 $ 20,285,511 520,325 20,805,836 Total Electric Plant $ $ -9SIERRA ELECTRIC COOPERATIVE, INC. NOTES TO FINANCIAL STATEMENTS Provisions for depreciation of electric plant is computed using straight-line rates are as follows: 2.28%- 3.00% 2.00% 10.00% - 20.00% 10.00% - 20.00% 10.00% - 20.00% 10.00% 4.00%- 8.33% Distribution Plant Structures and Improvements Office Furniture and Fixtures Transportation Equipment Power Operated Equipment Communication Equipment Miscellaneous General Plant Depreciation and amortization for the years ended December 31, 2016 and 2015, was $609,531 and $594,550 respectively, of which $548,924 and $532,000 was charged to depreciation expense, and $60,607 and $62,550 allocated to other accounts. 4. Investments in Associated Organizations and Other Investments Investments in associated organizations consisted of the following as of December 31,2016 and 2015: December 31, 2016 Associated Organizations CFC Capital Term Certificates Patronage Capital Tri-State G & T Patronage Capital Other $ 2015 140,781 95,017 3,134,683 91,352 3,461,833 $ 142,237 81,886 2,977,850 73,794 3,275,767 $ 5. Investments Classified as Available-for-Sale December 31, 2016 "Available-for-Sale" Investment Presented at Fair Value: Morgan Stanley and Edward Jones Cash Mutual Funds Government Bonds 13,306 539,958 25,134 578,398 2015 $ 15,311 556,007 $ 571,318 The Cooperative classifies its marketable debt and equity securities as "available-for-sale." Securities classified as "available-for-sale" are carried in the financial statements at fair value. Realized gains and losses, determined using the first-in, first-out (FIFO) method, are included in earnings; unrealized holding gains and losses are reported as a separate component of members’ equity. -10SIERRA ELECTRIC COOPERATIVE, INC. NOTES TO FINANCIAL STATEMENTS The bonds mature at various dates from 2030 to 2039. Amortized cost and fair value of available-forsale securities as of December 31,2016, are as follows: Fair Value Amo~ized Cost Cash Mutual Funds Bonds 13,306 558,862 24,934 597,102 $ 13,306 539,958 25,134 $ 578,398 Unrealized Gain(Loss) Level (18,904) 200 N/A 1 2 $ $ (18,704) 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. The securities above are considered Level 1 and 2. 6. Temporary Cash Investments - At Cost CFC Commercial Paper/Select Notes December31, 2016 2015 950,000 $ 750,000 7. Inventories Inventories consisted of: December31, 2016 Construction Materials and Supplies 160,845 2015 $ 136,873 -11SIERRA ELECTRIC COOPERATIVE, INC. NOTES TO FINANCIAL STATEMENTS o Deferred Charges Deferred charges consisted of: December 31, 2016 Regulatory Asset Other Cost of Service Study 454,344 30,208 71,123 555,675 2015 $ $ 478,844 47,354 24,986 551,184 Regulatory assets represent the Cooperative’s required costs associated with the merger of Plains Electric Generation and Transmission Cooperative, Inc. (Plains) into Tri-State Generation and Transmission Association, Inc. (Tri-State). Under the terms of the merger, the Cooperative was required to pay a buy-down of the Plains rates totaling $1,104,793, in order to equalize its Tri-State rates with that of the other Tri-State members. Of this amount, $330,433 was allocated to be recovered from the City of Truth or Consequences, New Mexico, a major consumer of the Cooperative, and the remaining $774,360 to be recovered from all other members of the Cooperative. The initial cost to the Cooperative was financed with a 35-year mortgage loan from RUS. The City of Truth or Consequences, New Mexico, agreed to forego the reduction in its rate resulting from the Plains and Tri-State merger and to apply that amount to the $330,433 described above, plus interest at a rate of five percent. The City of Truth or Consequences has completed the repayment of the $330,433, plus related interest. The Cooperative is amortizing the portion allocated to the remaining members over a 35-year period. Amortization amounted to $24,500 in 2016 and $24,500 in 2015. RUS and the New Mexico Public Regulatory Commission have granted approval for the recording of the regulatory asset. 9. Return of Capital Under the provisions of the mortgage agreements, until the equities and margins equal or exceed 30.0% of the total assets of the Cooperative, the return to patrons of capital contributed by them is limited generally to 25.0% of the patronage capital or margins received by the Cooperative in the prior calendar year. The equities and margins of the Cooperative represent 40.1% of the total assets at balance sheet date. Capital credits of $224,751 and $218,240 were retired during the years ended December 31, 2016 and 2015, respectively. -12SIERRA ELECTRIC COOPERATIVE, INC. NOTES TO FINANCIAL STATEMENTS 10. Patronage Capital December 31, 2016 Assigned Assignable $ 10,294,679 434,809 $ 9,703,088 591,609 $ 10,729,488 1,775,067 8,954,421 $ 10,294,697 1,550,320 8,744,377 Less: Retired Balance 2015 $ $ 11. Other Comprehensive Income December 31, 2016 Adjustment of Post-Retirement Benefits Accumulated Loss on Securities 2015 $ 55,000 $ (18,705) 39,600 (19,497) $ 36,295 $ 20,103 12. Other Equities Donated Capital $ December 31, 2016 2015 6,978 $ 6,841 13. Mortgage Notes - RUS and FFB Long-term debt due RUS/FFB is represented by 35-year mortgage notes payable to the United States of America. Following is a summary of long-term debt due RUS/FFB and maturing at various times between in 2017 and 2047: December 31, 2016 2015 RUS 5.000% Notes $ 5,080,553 $ 5,177,321 FFB 1.965% - 2.747% Notes $ Less: Current Maturities Less: Advance Payments $ 3,260,996 8,341,549 166,346 2,152,620 6,022,583 $ $ 500,000 5,677,321 97,792 2,048,270 3,531,259 Principal and interest installments on the above notes are due monthly for RUS and quarterly for FFB. -13SIERRA ELECTRIC COOPERATIVE, INC. NOTES TO FINANCIAL STATEMENTS As of December 31, 2016, annual maturities of long-term debt due RUS for the next five years are as follows: $ 2017 2018 2019 2020 2021 166,346 172,214 178,547 185,312 191,575 Advance payments of $2,152,620 are available to apply to quarterly principal and interest payments. The Cooperative has unadvanced loan funds from FFB in the amount of $1,015,000. 14. Mortgage Notes - CFC Following is a summary of long-term debt due CFC and maturing at various times from 2017 to 2034: December 31, 2016 Fixed Rate Notes - (3.65% - 5.35%) Less: Current Maturities $ 2015 5,993,915 381,157 $ 6,361,557 367,608 5,612,758 $ 5,993,949 Principal and interest installments on the above notes are due quarterly. As of December 31, 2016, annual maturities of long-term debt due CFC for the next five years are as follows: 2017 2018 2019 2020 2021 $ 381,157 378,500 302,200 314,300 310,300 15. Short-Term Borrowing The Cooperative has a $1,000,000 line of credit for short-term financing from National Rural Utilities Cooperative Finance Corporation at an interest rate currently at 2.9%. The Cooperative had not borrowed any funds under such agreement for the years ending December 31, 2016 or 2015. -14SIERRA ELECTRIC COOPERATIVE, INC. NOTES TO FINANCIAL STATEMENTS 16. Pension Benefits Pension benefits for substantially all employees of the Cooperative are provided through the National Rural Electric Cooperative Association (NRECA) 401(k) Savings Plan, a defined contribution plan qualified under Section 401 and tax exempt under Section 501(a) of the Internal Revenue Code. Employees make mandatory contributions of 3.00% of compensation, and the Cooperative contributes 7.40%. The employee can increase contributions up to an additional 4.00% of compensation and the Cooperative matches the additional contribution. The pension costs to the Cooperative for the years ended December 31, 2016 and 2015, were $79,531 and $87,824, respectively. 17. Insurance Benefits for Retirees The Cooperative provides post-retirement medical and dental benefits for eligible employees and directors through a plan with a Presbyterian Health Program. For purposes of this statement, the written plan in effect is the substantive plan, and is considered a defined benefit plan. All employees who retire after age 54, and were hired prior to December 12, 1991, are eligible for the benefits. All directors elected prior to April 1, 1992, are eligible for the benefit as well. Generally Accepted Accounting Principles 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, 2016 and 2015, were $43,000 and $45,600 respectively. The Cooperative’s policy for contributions is to contribute the amount of the current benefits in that year. The measurement date used for the current valuation is January 1,2016. The weighted-average discount rate used to develop the accumulated post-retirement benefit obligation was 4.45%. The assumed health care cost trend rate is 8.00% for 2016, declining to an ultimate level of 5.00% in 2022. If health care cost trend rate assumptions were increased by 1.00%, the accumulated post-retirement benefit obligation would be increased by approximately $39,300. The effect of this change on the sum of the service cost and interest cost components for the first year would be an increase of approximately, $3,300. -15SIERRA ELECTRIC COOPERATIVE, INC. NOTES TO FINANCIAL STATEMENTS Amounts recognized in the Cooperative’s financial statements and funded status of the plan are as follows: December 31, 2016 Post-Retirement Benefit Cost: Components of Net Periodic Post-Retirement Benefit Cost as of December 31, 2016 and 2015 Service Cost Interest Cost Amortization of Actuarial Gain Net Periodic Post-Retirement Benefit Cost $ $ Accumulated Post-Retirement Benefit Obligation (APBO) Reconciliation APBO Balance at Beginning of Year Actuarial Gain Total Expense Benefits Paid Net Post-Retirement Benefit Liability at Year End 2015 9,000 18,200 (1,800) 25,400 $ $ 20,400 (477,400) 17,200 (27,200) 43,000 $ (502,600) (444,400) $ (477,400) 20,400 (20,400) 45,600 Ill) Reconciliation of Funded Status APBO $ (444,400) $ (477,400) Accrued Post-Retirement Benefit Cost $ (444,400) $ (477,400) $ 39,600 17,200 (1,800) 55,000 $ $ 39,600 Accumulated Other Comprehensive Loss Actuarial Loss - Beginning of Year Adjustment per Valuation Study Amortization of Gain Other Comprehensive Income $ 39,600 The estimated actuarial gain for the post-retirement medical benefit plan that will be amortized from accumulated other comprehensive income into net post-retirement benefit cost over the next fiscal year is expected to be $1,100. The Cooperative has not funded any plan assets as of December 31, 2016 or 2015. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: 2017 $ 45,400 2018 47,900 2019 50,400 2020 20,900 2021 20,800 2022-2026 175,300 -16SIERRA ELECTRIC COOPERATIVE, INC. NOTES TO FINANCIAL STATEMENTS 18. Litigation and Commitments The Cooperative is not involved in any litigation as plaintiff or defendant that at December 31,2016, would have a significant effect on the financial statements. The Cooperative purchases power from Tri-State Generation and Transmission Association, Inc., of which the Cooperative is a member cooperative and is represented on the Board of Directors. The power is purchased under a contract which is effective until December 31, 2050. 19. Related Party Transactions The Cooperative purchases all of its power from Tri-State Generation and Transmission Association, Inc. As a member of Tri-State, the Cooperative has representation on the Board of Directors. 20. Subsequent Events The Cooperative’s management has evaluated subsequent events through February 21, 2017, the date which the financial statements were available for issue. 21. Recently Issued Accounting Pronouncement In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be clarified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The new standard is effective for nonpublic entities for fiscal years beginning after December 15, 2019. The Cooperative is evaluating the impact of the new standard on the financial statements. 22. Rate Matter Effective with usage beginning February 1, 2017, the Cooperative will implement a rate adjustment expected to increase revenue by 3.6% based on a test year ended December 31, 2015. ACCOMPANYING INFORMATION -17SIERRA ELECTRIC COOPERATIVE, INC. Schedule 1 ELECTRIC PLANT FOR THE YEAR ENDED DECEMBER 31, 2016 Balance 1/1/2016 Additions Balance 12/31/2016 Retirements CLASSIFIED ELECTRIC PLANT IN SERVICE Distribution Plant Land and Land Rights Station Equipment Overhead Conductors and Devices Poles, Towers, and Fixtures Underground Conduit Underground Conductors and Devices Line Transformers Services Meters Installations on Consumers’ Premises Street Lighting and Signal Systems Total $ $ 10,241 $ 291,341 5,914,885 5,419,906 41,607 1,096,841 3,374,648 1,331,544 651,546 101,308 15,853 18,249,720 $ General Plant Land and Land Rights Structures and Improvements Office Furniture and Equipment Transportation Equipment Stores Equipment Tools, Shop, and Garage Equipment Laboratory Equipment Power Operated Equipment Communications Equipment Total $ 19,000 $ 608,118 313,633 273,605 10,424 44,864 74,835 662,241 29,071 2,035,791 $ Total Classified Electric Plant in Service $ 20,285,511 Construction Work in Progress Total Utility Plant $ 520,325 $ 20,805,836 $ $ $ 149,053 188,633 773 26,618 50,834 7,660 25,485 72 40,862 46,856 96 4,642 22,257 1,356 12,381 8,966 449,128 $ 137,416 $ $ $ 20,630 19,047 8,358 24,872 9,045 38,813 87,535 $ 536,663 $ 33,230 $ 19,000 628,748 324,322 248,733 10,424 53,909 74,835 701,054 29,071 2,090,096 170,646 $ 20,651,528 1,886,432 2,423,095 $ 10,241 291,341 6,023,076 5,561,683 42,284 1,118,817 3,403,225 1,337,848 664,650 92,414 15,853 18,561,432 2,406,757 170,646 $ 23,058,285 -18SIERRA ELECTRIC COOPERATIVE, INC. Schedule 2 ACCUMULATED PROVISION FOR DEPRECIATION FOR THE YEAR ENDED DECEMBER 31,2016 Depreciation Accruals Balance 1/1/2016 Balance 12/31/2016 Retirements CLASSIFIED ELECTRIC PLANT IN SERVICE $ 5,773,595 General Plant Structures and Improvements Office Furniture Transportation Equipment Stores Equipment Tools, Shop & Garage Equipment Laboratory Equipment Power Operated Equipment Communication Equipment Total General Plant $ 183,358 $ 197,804 230,741 8,O53 36,717 27,633 504,315 5,237 1,193,858 $ 2,490 5,019 42,275 2,802 113,394 $ Total Classified Electric Plant in Service $ 6,967,453 609,531 Distribution Plant Retirement Work in Progress Total Utility Plant $ $ 496,137 $ 169,583 14,103 $ 28,373 18,332 8,358 24,872 $ 6,964,449 $ 609,531 $ (1) (1) Charged to Depreciation Expense Charged to Clearing and Other Accounts (2) Cost of Units Retired Add: Cost of Removal Less: Salvage and Other Credits Loss Due to Retirement 6,100,149 $ 197,461 217,819 224,201 8,053 39,207 32,652 546,590 8,039 1,274,022 33,230 $ 202,813 $ 141,730 (3,004) $ $ $ 548,924 60,607 $ 609,531 344,543 (2) $ 170,646 174,477 58O $ 344,543 7,374,171 (144,734) $ 7,229,437 -19SIERRA ELECTRIC COOPERATIVE, INC. Schedule 3 OTHER PROPERTY AND INVESTMENTS DECEMBER 31, 2016 AND 2015 December 31, 2016 2015 INVESTMENTS IN ASSOCIATED ORGANIZATIONS Memberships National Rural Utilities Cooperative Finance Corporation (CFC) National Rural Electric Cooperatives Association New Mexico Rural Electric Cooperative Association (NMRECA) Tri-State Generation and Transmission Association, Inc. National Information Solutions Cooperative Cooperative Services, Inc. National Rural Telecommunications Cooperative Patronage Capital National Rural Utilities Cooperative Finance Corporation Tri-State Generation and Transmission Association, Inc. National Information Solutions Cooperative Equity Allocations Federated Insurance CFC - Capital Term Certificates Other Patronage Capital Total Investments in Associated Organizations INVESTMENTS CLASSIFIED AS AVAILABLE-FOR-SALE Total Other Property and Investments 1,000 10 10 5 100 100 100 1,000 10 10 5 100 100 100 95,017 3,134,683 21,855 81,886 2,977,850 17,457 58,963 140,781 9,209 50,205 142,237 4,807 $ 3,461,833 $ $ $ 3,275,767 565,092 $ 556,007 $ 4,026,925 $ 3,831,774 Calendar Year 1973-1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Adjustment SIERRA ELECTRIC COOPERATIVE, INC. PATRO NAGE CAPITAL DECEMBER 31, 2016 Assgnable Assigned Cooperative Cooperative 1,569,562 263,301 288,004 315,693 444,391 271,647 324,949 110,649 162,444 243,738 233,747 308,594 120,230 260,350 425,732 431,658 428,213 391,179 372,343 350,405 277,962 156,833 14 277,976 156,833 7,316,829 2,977,850 516,698 569,469 392,589 314,809 265,923 370,462 306,714 241,186 Retirements and Adjustments 1,569,562 135,859 8,416 8,474 11,609 6,252 7,134 2,427 3,444 4,897 3,606 4,426 1,268 2,496 2,087 1,456 1,031 373 250 1,775,067 Schedule 4 Balance Cogperative 127,442 279,588 307,219 432,782 265,395 317,815 108,222 159,000 238,841 230,141 304,168 118,962 257,854 423,645 430,202 427,182 390,806 372,093 350,405 277,962 14 5,819,738 516,698 569,469 392,589 314,809 265,923 370,462 306,714 241,186 156,833 3,134,683 8,954,421 -21SIERRA ELECTRIC COOPERATIVE, INC. Schedule 5 RUS, FFB AND CFC MORTGAGE NOTES DECEMBER 31, 2016 RUS Mortgage Notes Date of Note Note Number Notes Paid in Full Notes Refinanced in 2011 08-01-07 RET-21-1 08-01-07 RET-21-2 08-01-07 RET-21-3 08-12-07 RET-21-4 08-12-07 RET-21-5 08-12-07 RET-21-6 RET-21-7 08-12-07 08-12-07 RET-21-8 08-12-07 RET-21-9 Total RUS Interest Rate Principal Amount 1,979,000 10,211 000 300 000 350 000 300 000 600 000 700 000 800 000 800 000 800 000 873 000 17,713 000 5% 5% 5% 5% 5% 5% 5% 5% 5% Principal Repa~’ments Net Obli~]ation $ 1,979,000 10,211,000 32,352 34,397 27,682 50,646 55,985 61,435 59,565 58,157 62,228 $ 12,632,447 267,648 315,603 272,318 549,354 644,015 738,565 740,435 741,843 810,772 5,080,553 9,792 3,208 14,271 7,515 4,218 490,208 196,792 985,729 842,485 745,782 39,004 3,260,996 307,012 207,088 97,267 60,217 41,988 75,204 81,084 72,783 78,159 69.377 186 871 257 870 267568 278O97 288552 294 013 309725 322354 330 832 322178 345 591 359,597 361,873 375,241 395,111 413,702 366,574 99,571 5,993,915 Amount Unadvanced FFB Mortgage Notes 11-19-15 02-17-16 03-04-16 06-01-16 07-25-16 Unadvanced Funds Total FFB H0010 H0015 H0020 H0025 H0030 2.747% 2.279% 2.313% 2.301% 1.965% $ 500,000 200,000 1,000,000 850,000 750,000 1,015,000 $ 4,315,000 $ 1,015,000 1,015,000 $ CFC Mortgage Notes 12-22-83 03-31-86 09-11-90 01-25-94 03-18-11 03-18-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 11-30-11 Total CFC 9002 9003 9004 9005 9006.7 9006.8 9007.6 9007.7 9007.8 9007.9 9007.10 9007.11 9007.12 9007.13 9007.14 9007.15 9007.16 9007.17 3007.18 3007.19 9007.20 9007.21 9007.22 9007.23 4.50% 4.90% 5.35% 4.55% 4.70% 4.95% 3.65% 3.90% 4.05% 4.20% 4.35% 4.45% 4.50% 4.60% 4.65% 4.75% 4.80% 4.80% 4.80% 4.85% 4.85% 4.90% 4.90% 4.90% $ 349,000 282,292 178,351 133,000 78,159 69,377 248 035 257 870 267 568 278.097 288.552 294013 309.725 322 354 330,832 322,178 345,591 359,597 361,873 375,241 395,111 413,702 366,574 99,571 $ 6,726,663 $ 61,164 0 $ 732,748 Net obligation includes $93,000 due RUS, $73,346 due FFB, and $381,157 due CFC payable within one year and classified as current liabilities on the balance sheet. SIERRA ELECTRIC COOPERATIVE, INC. Schedule 6 ADMINISTRATIVE AND GENERAL EXPENSES FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 December 31, 2016 Administrative and General Salaries 457,682 Increase /Decrease) 2015 $ 493,659 $ (35,977) Office Supplies and Expense 35,169 30,778 4,391 Outside Services Employed 48,015 45,685 2,330 Regulatory Commission Expense 53,434 Dues and Memberships 57,368 42,463 65,085 52,993 (11,651 ) 4,375 35,793 6,670 139,240 179,523 (40,283) 6,597 7,776 (1,179) Annual Meeting Expense 2,021 29,183 3,102 19,968 (1,081) 9,215 Maintenance of General Plant 64,240 61,045 3,195 Employee Training Board of Directors’ Expense Rural Development Capital Credit Expense Total 935,412 $ 995,407 $ (59,995) -23SIERRA ELECTRIC COOPERATIVE, INC. Schedule 7 FIVE YEAR COMPARATIVE DATA Financial Data OPERATING REVENUES Residential Irrigation Commercial and Industrial Power Cost Adjustment Sales for Resale Other Operating Revenues Total Operating Revenues OPERATING EXPENSES Purchased Power Distribution - Operation Distribution - Maintenance Customer Accounts Customer Service and Information Administrative and General Expense Depreciation and Amortization Other Interest Other Deductions Total Operating Expenses OPERATING MARGINS - Before Fixed Charges $ $ NONOPERATING MARGINS Interest Income Loss on Sale of Available-for-Sale Securities Other Nonoperating income NET MARGINS Miscellaneous Statistics # of Accounts Billed at Year End KWH Sales (000) Times Interest Earned Ratio - Total Debt Service Coverage Equity to Total Assets Equity to Total Capitalization 3,914,694 156,672 2,449,682 (39,904) 2,068,521 56,010 $ 8,605,675 5,227,501 466,135 271,107 319,164 935,412 573,424 974 3,851 $ 7,707,824 995,407 556,500 930 10,945 7,847,689 $ 2013 2012 $ 3,765,187 140,330 2,349,667 20,399 2,233,626 51,089 $ 8,560,298 $ 3,854,022 147,023 2,305,890 18,882 2,539,609 56,030 $ 8,921,456 3,877,259 169,780 2,350,757 3,112 2,301,672 49,151 8,751,731 $ 5,230,201 494,O33 259,916 357,175 4O 927,150 521,654 1,020 5,911 $ 7,797,100 $ 5,542,884 528,383 257,135 399,421 (134) 837,722 517,664 409 13,693 $ 8,097,177 5,373,549 536,651 298,161 365,639 1,309 858,201 502,874 368 1,065 7,937,817 $ $ 685,002 757,986 599,490 561,099 85,512 196,887 156,833 49,853 241,186 46,113 $ 292,198 484,186 $ 542,465 $ 134,764 129,525 $ 146,874 7,833 $ 142,597 $ (36,923) 14,802 107,404 (2,019) !8,263) $ 136,592 (34,766) 1,508 $ 113,19g $ 55O 132,781 $ $ 591,590 $ 679,057 $ 761,642 $ 694,136 4,141 65,347 2.05 1.70 43.6 46.8 4,151 66,524 2.18 1.75 42.3 45.5 4,156 67,797 2.29 1.91 39.9 43.0 $ G & T Capital Credits Other Capital Credits NET OPERATING MARGINS $ $ 5,036,058 455,142 341,284 361,679 FIXED CHARGES Interest on Long-Term Debt OPERATING MARGINS - After Fixed Charges 3,870,456 135,988 2,381,023 15,393 1,937,068 52,898 8,392,826 December 31, 2014 2015 2016 434,795 4,169 63,103 1.73 1.33 40.1 42.5 763,198 824,279 813,914 590,545 544,486 233,734 269,428 370,462 44,247 265,923 26,004 $ 648,443 561,355 $ 146,457 132,231 575,753 $ 187,445 $ 306,714 48,306 4,168 68,932 2.27 1.63 34.0 39.2 COMPLIANCE AND INTERNAL CONTROL SECTION BOLINGER, SEGARS, GILBERT & Moss, L.L.P. FAX; (B0~) ~4~-3B 1 .~ LtTBBO(’K, TEXA~ 79423-1,~)54 REPORT ON COMPLIANCE WITH ASPECTS OF CONTRACTUAL AGREEMENTS AND REGULATORY REQUIREMENTS FOR ELECTRIC BORROWERS Independent Auditor’s Report Board of Trustees Sierra Electric Cooperative, Inc. Elephant Butte, New Mexico We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audit contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Sierra Electric Cooperative, Inc. (the Cooperative), which comprise the balance sheet as of December 31,2016, and the related statements of income, comprehensive income and patronage capital, changes in cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated February 21,2017. In accordance with Government Auditing Standards, we have also issued our report dated February 21, 2017, on our consideration of the Cooperative’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. No reports other than the reports referred to above have been furnished to management. In connection with our audit, nothing came to our attention that caused us to believe that the Cooperative failed to comply with the terms, covenants, provisions, or conditions of their loan, grant, and security instruments as set forth in 7 CFR Part 1773, Policy on Audits of Rural Utilities Service Borrowers, § 1773.33 and clarified in the RUS policy memorandum dated February 7, 2014, insofar as they relate to accounting matters as enumerated below. However, our audit was not directed primarily toward obtaining knowledge of noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding the Cooperative’s noncompliance with the above-referenced terms, covenants, provisions, or conditions of the contractual agreements and regulatory requirements, insofar as they relate to accounting matters. In connection with our audit, we noted no matters regarding the Cooperative’s accounting and records to indicate that the Cooperative did not: Maintain adequate and effective accounting procedures; Utilize adequate and fair methods for accumulating and recording labor, material, and overhead costs, and the distribution of these costs to construction, retirement, and maintenance or other expense accounts; Reconcile continuing property records to the controlling general ledger plant accounts; Clear construction accounts and accrue depreciation on completed construction; Record and properly price the retirement of plant; -24- -25- Seek approval of the sale, lease or transfer capital assets and disposition of proceeds for the sale or lease of plant, material, or scrap; Maintain adequate control over materials and supplies; Prepare accurate and timely Financial and Operating Reports; Obtain written RUS approval to enter into any contract for the management, operation, or maintenance of the borrower’s system if the contract covers all or substantially all of the electric system; Disclose material related party transactions in the financial statements. In accordance with requirements for related parties in generally accepted accounting principles; Record depreciation in accordance with RUS requirements (See RUS Bulletin 183-1, Depreciation Rates and Procedures); Comply with the requirements for the detailed schedule of deferred debits and deferred credits; and Comply with the requirements for the detailed schedule of investments. This report is intended solely for the information and use of the Board of Trustees, management and the RUS and supplemental lenders and is not intended to be and should not be used by anyone other than these specified parties. However, this report is a matter of public record and its distribution is not limited. Certified Public Accountants Lubbock, Texas February 21, 2017 BOLIN(~ER, SE(;ARS, GILBERT ~ Moss, L.L.P. PHONE:; (8DE} ’74’7-3B08 FAX: (BD6) ~4~-3B15 LI~BBO(’Ii, TEXA~ 79423-1954 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF THE FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Independent Auditor’s Report Board of Trustees Sierra Electric Cooperative, Inc. Elephant Butte, New Mexico 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 Sierra Electric Cooperative, Inc., as of and for the years ended December 31, 2016 and 2015, and the related notes to the financial statements, which collectively comprise Sierra Electric Cooperative, Inc.’s basic financial statements, and have issued our report thereon dated February 21,2017. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Sierra Electric Cooperative, Inc.’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 Sierra Electric Cooperative, Inc.’s internal control. Accordingly, we do not express an opinion on the effectiveness of Sierra Electric Cooperative, Inc.’s internal control. A deficiency in internal control exists when the design Or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. -26- -27Compliance and Other Matters As part of obtaining reasonable assurance about whether Sierra Electric Cooperative, Inc.’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Certified Public Accountants Lubbock, Texas February 21,2017