Bailey County Electric Cooperative Association

“Because the bylaws govern how the organization operates on a cooperative basis with its members, the board of directors ("the board") periodically initiates a review of the bylaws by legal counsel in order to clarify the rights and responsibilities of the members, the board, and the cooperative as a whole. During the summer and fall of 2019, the board initiated such a review of the cooperative's bylaws. The review resulted in the following summarized changes: article i "membership" - section 1 was amended to: (1) update the list of eligible members to include associations and subdivisions of a governmental entity, (2) authorize the use of an electronic membership application forms, (3) state that acceptance or rejection of membership application is the responsibility of the board, (4) limits the number of memberships a member may have to one regardless of the number of meters, (5) limits transferability of a membership, and (6) authorize the board the ability to establish classes of memberships and through policies of general application, the types of services that are patronage eligible. Article i, sections 3 and 4 clarify eligibility of a joint membership, updates the definition to include any legal spouse, delineates the rights and responsibilities of the joint membership (including the shared rights and responsibilities of each legal spouse covered under the joint membership), and the process for converting to a joint membership. Article i, section 5 was added to clarify the voting rights of organizational memberships for non-natural entities. To ensure that all members are represented, including non-natural entities, this new section requires a non-natural entity to designate and inform the cooperative of the individual responsible for representing its voting interests. Article i, section 6 replaces the fixed membership fee of $5 with authority granted to the board for setting a membership fee of not less than $5. It also clarifies that additional fees may be charged for each service connections, extension and other available services offered pursuant to rules and regulations established by the board for the cooperative and its members. Article i, section 8 was added to address the termination and transfer of membership, including the circumstances and processes under which a member may be expelled from the cooperative. It also states that a membership is cancelled if the member ceases purchasing services from the cooperative or a member who does not purchase services for a period of six months after service is available. Processes are established for when a member may transfer the respective membership and the extent to which the membership fee is refundable. Article ii "rights and liabilities of members" was expanded to address: (1) liquidation rights upon dissolution of the cooperative, (2) protection of patronage capital credits for former members, and (3) conditions of services. Specifically, liquidation rights include the amounts remaining after all debts have been paid and capital furnished by the members has been retired. Such amounts remaining will be distributed pro rata to the members based on the ratio the aggregate patronage of each bears to the aggregate patronage of all members. With respect to the rights of former member, any member whose membership has terminated continues to own the member's patronage capital credits. However, such former member does not have voting rights. Additionally, a section for conditions of services was added to clarify the cooperative's responsibilities to make reasonable provisions to supply a steady and continuous electric service with respect to a member's class of service, the conditions which may limit the cooperative's ability to continuously supply electricity, the cooperative's responsibility to restore services, and limitations of the cooperative's liability to the cost of necessary repairs or physical damage approximately caused by the service failure to those electric”

“With respect to director liability, article iv, section 7 was amended to list the circumstances under which a director is liable to the cooperative, such as a breach of duty of loyalty to the cooperative or its members, acts or omissions not in good faith involving intentional misconduct or a known violation of law, receipt of an improper benefit, and an act or omission, the liability for which is provided for by law. To address changes in technology, article v "meetings of directors" was updated for specificity for when the timing and type of notice of board meetings, when a waiver of notice applies and the ability to meet by telephone conference or other remote communications technology. The revisions provide guidance for how these telephonic or remote meetings are to occur and to insure that each director has the appropriate technology. Article vi "officers" was amended and updated primarily to: (1) specifically authorize the secretary of the board, with approval of the board, to delegate authority to an employee of the cooperative for carrying out certain administrative duties of the secretary, (2) to address the indemnification of officers acting in good faith for the cooperative and authorize the purchase of applicable insurance, and (3) to address continuance of the governance of the cooperative when there is a catastrophic loss of board members. When the cooperative experiences a loss of four or more directors resulting from an event of natural or human origin, a catastrophic loss is deemed to have occurred. Under these circumstances, the remaining directors shall appoint, within 120 days, individuals meeting the director eligibility requirements to serve, until the next annual meeting, as directors for the districts losing their directors. If only 2 or less directors remain or if no directors remain, then a special meeting of the members will be called within 90 days of the catastrophic event for electing eligible individuals for filling the vacant director positions until the next scheduled annual meeting, at which time the these interim directors will stand for election. Additionally, the quorum requirements are simplified in order to allow the cooperative and its members to respond to a catastrophic loss of directors. Article viii "non-profit operation" was amended in order to clarify the pre-existing legal obligation to allocate patronage capital credits to its members. Specifically, section 2 defines the pre-existing legal obligation to include margins from the provision of patronage business. The obligation to allocate on the basis of patronage does not change. Under this clarification, the board has the authority to determine how losses from patronage business are handled as long as such methodology is consistent with accepted accounting practices, loan covenants and tax law. Additionally, section 2 was updated to provide the board with the authority to determine the nature, time, method and extent of any retirement of patronage capital credits. This authority includes the ability to retire or offer to retire patronage capital credits at a discount. A member's ability to assign patronage capital credits, such as in the case of a dissolving non-natural entity, to other individuals and members in good standing with the cooperative was clarified. Amounts approved for retirement are also considered to be indebtedness by the cooperative to the cooperative. Article viii, section 3 was updated specifically to address margins derived from non-patronage business. The ability of the board to utilize such margins to offset any loss of the cooperative remains unchanged. In addition to the ability of the board to authorize that margins from non-patronage business, in excess of losses, be allocated to the members, such margins may also be used to establish retained capital not assignable to the members except in the event of dissolution of the cooperative. In order to implement the provisions of article viii, section 4 was a”

“The cooperative was formed by the members to provide electric service at cost on a cooperative basis.”

“The members of the cooperative vote on the board of directors. Elections are done on a one member one vote basis.”

“The following acts require approval of the members of the cooperative: 1. Amendments to the articles of incorporation 2. Disposal of a substantial portion of the cooperative's assets 3. Dissolution/liquidation of the cooperative 4. Merger or consolidation of the cooperative with another organization”

“The cooperative has no committees with authority to act on behalf of the governing body. Therefore, and pursuant to form 990 instructions, the question has been answered "no".”

“Management presented a copy of the form 990 to the board for discussion and review prior to filing.”

“All new employees and directors are required to sign a conflict of interest certification when they begin employment with the cooperative. All employees, directors and officers are required to review and be familiar with the policies outlined in the cooperative's conflict of interest policy and are required to disclose any action or situation that might violate the policy to the full board of directors as soon as possible. The president/ceo regularly monitors and enforces this policy.”

“The board of directors utilize internal resources and conduct an annual review before determining and approving the compensation of the president/ceo. Other than the president/ceo, the cooperative did not have any employees meeting the definition of officer or key employee. Therefore, and pursuant to form 990 instructions, line 15b has been answered "no".”

“The cooperative provides a summarized copy of its financial statements to the members of the cooperative at the annual meeting. A copy of the cooperative bylaws are provided (1) to every new member at the time of their membership (2) to all members when an admendment is made to the cooperative bylaws, and (3) are available on the cooperative's website. The cooperative will provide a complete copy of the audited financial statements, conflict of interest policy, or governing documents to any member who requests a copy.”

“In order to provide retirement benefits to its employees, the cooperative has established a defined contribution plan under section 401(k) of the internal revenue code. Employer contributions to the plan are made pursuant to the plan document. Additionally, the cooperative participates in a multi-employer defined benefit plan. Contributions to this plan are based on the full funding limitation of such plan. Employer contributions for both plans are available to participating employees, including officers, meeting the eligibility requirements of such plans. The cooperative also provides health and life insurance to all eligible employees, including officers, through a qualified plan. The amounts reported on part vii, column (f) for the officer is comprised of the actuarial increase in the defined benefit plan, the total amount contributed by the cooperative to the defined contribution plan and insurance paid on behalf of and for their benefit.”

“The board of directors consider the president/ceo to be both the top management official and the top financial official. Therefore, only the president/ceo is listed as an employee officer.”

“Patronage dividends result from the purchase of wholesale power from a generation & transmission cooperative. Patronage dividends also result from the payment of interest from cooperative banks and the purchase of supplies and services from other cooperative organizations. The expenses associated with purchases from and payments to such cooperative organizations are a direct component of cost of the electric service provided by the cooperative to its members.”

“Although the company is no longer a rural utilities service (rus) borrower, its accounting records are maintained in accordance with the rus uniform system of accounts (usoa) as prescribed for rus electric borrowers. The usoa does not record expenses in the general expense categories provided on part ix lines 1-23. The cooperative separately reports salaries and wages, employee benefits and payroll taxes that are allocated in accordance with their accounting system, but other expenses that are described in lines 1-23 are reported on line 24 under the expense categories required by the usoa.”

“Salaries and wages are allocated to asset, liability, and expense accounts based on the accounting system described above. The following schedule reconciles amounts reported on lines 5-7 to total wages accrued and/or paid: total per lines 5-7 $ 2,597,266 less: director fees reported on forms 1099-misc (149,614) less: employee officer benefits included in line 5 (99,282) plus: salaries and wages capitalized directly to plant 580,251 plus: salaries and wages capitalized/expensed indirectly through clearing and other accounts 305,428 total wages accrued and/or paid $ 3,234,049”

“Administrative & general expense is comprised of the following: administrative & general $ 640,820 office supplies 122,483 outside services 81,551 directors 175,698 annual meeting 62,599 institutional and goodwill advertising 28,624 member education and youth program 36,321 dues to assoc. Organizations 43,426 miscellaneous general 68,085 regulatory commission 65,372 maintenance of general plant 293,471 total admin & general exp per financial statements $ 1,618,450 less: reclass of director fees to part ix, line 5 (149,614) less: reclass of labor to part ix, lines 5 & 7 (662,082) less: reclass of benefits to part ix, lines 8-10 (371,131) total admin & general expense per form 990, part ix $ 435,623”

“Pursuant to the form 990 instructions, the amount of patronage dividends paid to the members (hereinafter referred to as "patrons") should be reported on part ix, line 4. The phrase "patronage dividends paid" refers to the process, subsequent to year-end, by which the cooperative allocates patronage capital to and, therefore, operates at cost with its patrons. The cooperative's tax exempt purpose is to provide electricity to its patrons and to do so on a cooperative basis. Tax law defines "operating on a cooperative basis" as subordination of capital, democratic control, and operation at cost. The cooperative operates at cost through the allocation of true patronage dividends (also referred to as allocations of patronage capital) to its patrons. Patronage dividends are considered paid if the allocation is made (1) pursuant to a pre-existing obligation, (2) from the margins produced from the transactions done with or for patrons, and (3) in a fair and equitable manner on the basis of patronage (i.e. Purchases). Additionally, the allocation of patronage dividends should be made within a reasonable time period after the close of the cooperative's calendar tax year-end of december 31. Each one of these requirements for a true patronage dividend is provided for in the non-profit operation article of the cooperative's bylaws. The amount reported on part ix, line 4 represents the amount of patronage capital that is either allocated or to be allocated to the patrons resulting from their purchase of electricity from the cooperative for the 2019 calendar year. Because patronage dividends are the process by which the cooperative operates at cost with its patrons and thereby a key component to accomplishing its exempt purpose, the cooperative has reported such amounts as an expense for form 990 reporting. Patronage dividends are not an expense for financial statements prepared in accordance with generally accepted accounting principles, however.”

“All donations are made to non-profit and civic organizations that are located in the cooperative's service area, and are intended to improve the communities in which our members reside. Each donation made during the year was below the reporting threshold of schedule i, part ii.”

“Other expenses is comprised of the following: transmission $ 48,422 other deductions 889 sales 1,238 total other expenses per form 990, part ix $ 50,549”

“Patronage capital allocated or to be allocated 2,175,456. Patronage capital retired - total -2,059,993. Patronage capital retired - unclaimed -28,574. Net change in memberships 45. Reclassification of custodial scholarship and energy efficiency accounts -1,709.”

“Audited financial statements were prepared by an independent accountant for the cooperative's financial statement audit year-end of september 30. The tax return has been and continues to be prepared based on a calendar tax year-end of december 31. The board as a whole is responsible for overseeing the financial statement audit and selecting the independent financial statement auditor.”