2016 Annual Report

In 2016, Butler Rural Electric Cooperative’s General Manager Mike Sims was honored with the Touchstone Energy® Distinguished Service Award. Touchstone Energy represents a nationwide alliance of more than 750 local, member-owned electric co-ops in 46 states dedicated to providing members with safe, reliable and affordable electricity. Butler Rural Electric has been a Touchstone Energy cooperative since 1998.

The Touchstone Energy Distinguished Service Award is the brand’s highest honor, presented annually to a cooperative employee or director who has made outstanding contributions to building the brand on the national stage. Throughout the many hours Mike has dedicated to the members, employees and trustees of Butler Rural Electric Cooperative, he has earned the respect and admiration of us all. His time at Butler Rural Electric has played a large role in the cooperative’s 80 years of success.

Eighty years ago, investor-owned utilities would not extend power lines into rural areas because doing so wouldn’t produce a profit. Unwilling to do without electricity, a group of rural residents came together in order to accomplish one goal: bring safe, reliable and affordable electric service to rural areas. Citizens worked together to accomplish something that was too big for one group to do alone. With the support of President Franklin D. Roosevelt and the Rural Electrification Act of 1935, the foundation for the electric cooperative business model was established and rural residents were given the resources they needed to empower their own lives.

The member-owned, not-for-profit business model was driven by values instead of profits. The cooperative form of business guarantees every member a voice in business decisions and is set apart from other business models because margins are returned to members in the form of capital credits.

The cooperative is still owned and operated by the members we serve in Butler, Hamilton, Preble and Montgomery counties. Throughout the years, the cooperative has grown to serve more than 11,500 members in 17 local townships. Since the incorporation of the cooperative in 1936, the board of trustees and employees have worked diligently to hold down costs and provide safe, reliable and affordable electric service to all members. We take pride in serving our local community. The employees and trustees, past and present, are the neighbors, friends and families of our members. We will always work for the people we serve, to enhance their lives, and provide them with safe, reliable and affordable electric service.

Our members are the owners of the cooperative. They have the power to elect the board of trustees each year at the Annual Meeting. Trustees meet monthly and vote on rates, policies and other matters affecting the cooperative. Each trustee has been educated on the cooperative business model and has gone through rigorous training, which gives them the ability to make informed decisions on behalf of the membership.

Trustees and employees of Butler Rural Electric Cooperative work each day to bring value to the lives of our members and to the communities they live in. We want your experience with us to be more than just the end result of using electricity. We strive to make every contact with your cooperative positive and pleasant.

There’s a reason cooperatives have stood the test of time. The cooperative principles and values put power in the right hands – the members’. Today, Butler Rural Electric Cooperative remains steadfast and committed to our members with the same values and principles as those who paved our way. That’s the cooperative difference.

Michael L. SimsGENERAL MANAGER

A message to our members

BUTLER RURAL ELECTRIC COOPERATIVE BOARD OF TRUSTEES

David Evans, Secretary & TreasurerDISTRICT 1

James MeadorDISTRICT 2

Thomas McQuiston, PresidentDISTRICT 3

Tammy MannDISTRICT 4

Robert Hoelle, Vice PresidentDISTRICT 5

Ronald KolbDISTRICT 6

Michael TiltonDISTRICT 7

Robert SpaethDISTRICT 8

William “Butch” Foster Jr. DISTRICT 9

District 1 Israel & Oxford townships District 2 Milford Township District 3 Somers Township District 4 Gratis & German townships District 5 Wayne & Madison townships District 6 Reily Township District 7 Hanover & St. Clair townships District 8 Morgan & Harrison townships District 9 Ross, Fairfield, Crosby & Colerain townships

Thomas Humbach, Attorney

THE 7 COOPERATIVE PRINCIPLESVOLUNTARY & OPEN MEMBERSHIP Membership in a cooperative is available to all who can reasonably use its services, regardless of race, religion, gender or economic circumstances.

DEMOCRATIC MEMBER CONTROLCooperatives are democratically controlled by their members, with each member having one vote. Directors are elected from the membership. As a result, control remains in the hands of the members.

MEMBERS’ ECONOMIC PARTICIPATIONMembers contribute equally to the capital of their cooperative. Cooperatives provide services at cost and remain not-for-profit. Money left over after all expenses are paid is called the margins. We return margins to our members every year. In 2015, the cooperative retired over $1.8 million in capital credits to members!

AUTONOMY & INDEPENDENCECooperatives are self-sustaining, self-help organizations controlled by their members. If cooperatives enter into agreements with others or raise money from outside sources, they do so on terms that maintain democratic control as well as their unique identity.

EDUCATION, TRAINING & INFORMATIONKeeping members, directors, managers and employees up to date on important issues allows them to effectively contribute to the development of their cooperative. Communication, particularly with young members and opinion leaders, helps generate necessary public support for cooperatives.

COOPERATION AMONG COOPERATIVESCooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional and international structures.

CONCERN FOR COMMUNITYWhile focusing on member needs, cooperatives strengthen communities with programs supported by the membership.

MEMBER BENEFITS SCHOLARSHIPSFive high school seniors, all children of Butler Rural Electric Cooperative members, were awarded scholarships totaling $10,100. Three of the cooperative’s scholarship winners advanced to the statewide competition, where Benjamin Hiner and Robbie Tuttle received additional scholarships from Ohio’s Electric Cooperatives.

2016 SCHOLARSHIP RECIPIENTS Nathan CorbisseroBenjamin HinerMorgan McQueenRobbie TuttleMadalyn Young

YOUTH TOURFive high school students represented Butler Rural Electric on the Electric Cooperative Youth Tour in Washington, D.C. Youth Tour is an annual leadership program coordinated by Butler Rural Electric Cooperative and Ohio’s Electric Cooperatives. It’s a weeklong, all-expenses-paid trip to Washington, D.C., that gives exceptional high school students the opportunity to meet with their Congressional leaders at the U.S. Capitol, make new friends from across the country, and see many of the famous Washington sights.

2016 YOUTH TOUR DELEGATESNatalie HopkinsEmily MuenchElizabeth SchultePeter WhitemanDavid Winter

GREENLIGHT A VETIn November, the cooperative donated 250 green LED light bulbs to Ross High School to show support for veterans through the Greenlight A Vet Campaign. Greenlight A Vet is a campaign to establish visible national support for our veterans by changing one light to green. The cooperative also gave away green LED light bulbs to members to allow them to show their support.

WEBSITE UPDATEThe cooperative launched its new website in November. The new website offers many new features, including the ability for members to log in to SmartHub directly on the home screen of the website.

The new website was designed using a template provided by Touchstone Energy. Touchstone Energy is also hosting Butler Rural Electric Cooperative’s website, saving the cooperative thousands of dollars in hosting fees, which helps us hold down costs for our members.

Left, 2016 Youth Tour delegates representing Butler Rural Electric Cooperative. Back row, left to right, David Winter and Peter Whiteman. Front row, left to right, Olivia Tilton, Elizabeth Schulte, Emily Muench and Natalie Hopkins.

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TONIGHT, I’M HAPPY TO ANNOUNCE THERE WILL BE NO RATE INCREASE IN 2016!Board of Trustees President Tom McQuiston during his report to members at the 2016 Annual Meeting

Butler Rural Electric Cooperative is in a strong financial position and the outlook for the cooperative remains bright. In 2016, the cooperative worked for another year to keep in-house costs down and hold down energy costs while continuing to provide members with safe, reliable and affordable electric service.

The cooperative will continue to make every effort to minimize the impact of costs on members. We are confident our forecast reflects realistic revenues, expenses and margins needed to produce adequate capital to operate the cooperative efficiently. We are also mindful that environmental and legislative mandates and regulations can have an impact on the cost members pay. Despite past mandates and regulations, the cooperative’s rates remain stable.

THE COOPERATIVE DIFFERENCEBUTLER RURAL COMMUNITY CONNECTIONButler Rural Community Connection has continued to make an impact on local organizations in our communities. Members voluntarily round up their bills each month to contribute small change to make a big difference. 8,198 Butler Rural Electric Cooperative members and employees are making monthly Community Connection contributions by rounding up their electric bills, which average about 50 cents each month.

In 2016, $71,046 in grants were awarded. Since 1995, Butler Rural Community Connection has awarded over $1 million in grants to local organizations in our communities.

NEW BILL FORMATThe cooperative revised the bill format so members can easily identify important information and the cooperative can communicate more messages right on the bill. The graph on the bill helps members identify trends in monthly energy use and see the influence of outdoor temperatures on electric use.

Butler Rural Electric Cooperative is focused on providing our members with affordable electric service and constantly strives to hold down costs. The new bill format did not cost additional money and did not increase rates.

MEMBER SATISFACTIONEach year, the American Customer Satisfaction Index, or ACSI, is determined for Butler Rural Electric Cooperative. The index measures the satisfaction of household consumers with the quality of products and services offered by individual firms. Overall satisfaction with the cooperative was excellent, with an ACSI score of 89, which is higher than industry leaders. The co-op is rated most positively for having friendly, courteous employees, employees who are highly trained and professional, supporting the local community, and being easy to reach.

CAPITAL CREDITSThanks to financial planning and holding down costs, the board of trustees approved the retirement of capital credits again in 2016. Butler Rural Electric Cooperative retired over $2.2 million in capital credits to members.Unlike investor-owned utilities that maximize profits to pay their shareholders, not-for-profit electric cooperatives do not exist to earn a profit. Members receive capital credits because they are more than a customer, they’re an owner of Butler Rural Electric Cooperative. Capital credits represent a member’s ownership in Butler Rural Electric and are one of the most unique and rewarding benefits they enjoy as a member of the cooperative.

Left, a family poses for a picture during Family Day, the cooperative’s annual member appreciation event.

KEEPING THE LIGHTS ONRELIABILITY FOR OUR MEMBERSClearing the right of way is critical to keeping your lights on. On average, 15 percent of power interruptions occur when trees, shrubs or bushes grow too close to power lines. To cut back on potential tree-related problems, Butler Rural Electric Cooperative operates an aggressive tree-trimming program. In 2016, $1,150,000 was invested in the cooperative’s right of way clearing program.

SUBSTATION UPGRADESLayhigh, Colerain and West Alexandria substations received major upgrades to increase capacity and improve reliability. The conversion increased the capacity of both substations to 20 megawatts and increased safety for cooperative employees. Crews converted the protection systems of the Layhigh and Colerain substations from fuse-based systems to relay-based systems.

The West Alexandria Substation was upgraded from 5 megawatt capacity to 10 megawatt capacity. The cooperative was able to hold down costs by utilizing existing equipment for the upgrade. All of the cooperative’s substations now have a minimum capacity of 10 megawatts.

HOLDING DOWN COSTSThe cooperative installed emergency generators in all substations to maintain control during transmission outages. This will allow the cooperative to quickly use automated switching and improve reliability.

Automated switching allows the cooperative to reduce outage times and hold down costs. In some cases, power can be switched from one substation to another in order to reduce outage times. Automated switching allows this change to happen within minutes, instead of within hours like it sometimes took in the past. Instead of switching power from one substation to another by sending trucks and crews to the site, automated switching is performed remotely at our facility. Remote switching allows our crews to perform maintenance more efficiently as well.

KEEPING OUR COMMUNITY SAFEApproximately 1,750 people from local schools, fire departments and other community organizations saw a valuable demonstration in 2016 from the cooperative’s safety department that focused on the dangers of electricity.

SAFETY FOR ALL EMPLOYEESSafety for members, employees and the community is extremely important to Butler Rural Electric Cooperative. In 2016, cooperative employees drove a total of 308,253 miles without a loss-time accident. Cooperative employees participate in training and education on an annual basis to ensure employees are prepared and remain safe in every circumstance.

BALANCE SHEETSEPTEMBER 30, 2016 & 2015

$77,411,931 1,497,292

78,909,223

(16,998,045) 61,911,178

12,105,760

263,665 785,886 478,589

13,633,900

3,089,503

2,659,819 67,796 10,127

377,187 1,589,2647,793,696

$83,338,774

ASSETSUtility PlantElectric plant in service Construction work in progress

Less: Accumulated provision for depreciation and amortization NET UTILITY PLANT

Investments and Other AssetsInvestments in associated organizations Investments in non utility property, net of accumulated depreciation of $685,466 ($616,357 for 2015) Mortgage and notes receivable Deferred charges TOTAL INVESTMENTS & OTHER ASSETS

Current AssetsCash and cash equivalents Accounts receivable, net of allowance for doubtful accounts of $27,248 ($46,760 for 2015)Accounts receivable – otherInterest receivable Materials and supplies Other current and accrued assets TOTAL CURRENT ASSETS

TOTAL ASSETS

20152016

$78,185,986 2,117,318

80,303,304

(16,784,548) 63,518,756

13,086,713

252,972 741,936727,348

14,808,969

2,264,412

2,770,349 89,440 10,099

441,299 1,752,8187,328,417

$85,656,142

$39,202,572 116,060 116,020

39,434,652

1,989,138 19,040,934 16,269,806

555,90037,855,778

1,257,603 1,330,425 1,247,094

56,100 252,436 961,705 942,981

6,048,344

$83,338,774

LIABILITIES AND EQUITIESEquitiesPatronage capital Memberships Other equities TOTAL EQUITIES

Long-Term LiabilitiesMortgage notes payable – CFC Mortgage notes payable – FFBMortgage notes payable – CoBank Accrued postretirement benefits TOTAL LONG-TERM LIABILITIES

Current LiabilitiesCurrent maturities of long-term debt Accounts payable – purchased power Accounts payable – other Provision for pensions and benefits Consumer deposits Accrued taxes Other current liabilities TOTAL CURRENT LIABILITIES

TOTAL LIABILITIES AND EQUITIES

$39,498,255 117,040 116,020

39,731,315

1,824,652 21,559,388 15,643,748

561,00039,588,788

1,373,227 1,273,291 1,101,445

56,100 277,810

973,8561,280,310

6,336,039

$85,656,142

$32,950,788

16,841,622 26,344

2,350,821 1,896,062

811,127 686,942

2,598,655 327,059

2,375,391 982,870

28,896,893

4,053,895

1,572,740

2,481,155

1,108,218

3,589,373

70,789

(57,554) 13,235

$3,602,608

OPERATING REVENUES

Operating ExpensesCost of power Transmission expense Distribution expense – operations Distribution expense – maintenance Consumer accounts Consumer service and information expense Administrative and general Maintenance of general plant Depreciation of utility plant Taxes TOTAL OPERATING EXPENSES

OPERATING MARGINS BEFORE FIXED CHARGES

Interest on long-term debt

OPERATING MARGINS AFTER FIXED CHARGES

Capital credits

OPERATING MARGINS

Non-Operating Margins (Expense)Interest income Other income (expense) TOTAL NON-OPERATING MARGINS

NET MARGINS FOR PERIOD

2015

STATEMENTS OF REVENUE & EXPENSESFOR THE YEARS ENDED SEPTEMBER 30, 2016 & 2015

$31,664,397

15,970,389 23,741

2,364,084 2,387,749 795,237

719,814 2,817,095

372,442 2,367,204

940,769 28,758,524

2,905,873

1,516,349

1,389,524

1,526,637

2,916,161

71,198

(140,821) 69,623

$2,846,538

2016

Balance, October 1, 2014 Net margins for yearAssignment of prior year's patronage capitalChange in membershipCapital credits reassigned Retirement of patronage capital Balance, September 30, 2015

Net margins for year Assignment of prior year's patronage capital Change in membership Capital credits reassigned Retirement of patronage capital Balance, September 30, 2016

Assignable Assigned Total Memberships Other Equities

Patronage Capital

STATEMENTS OF CHANGES IN MEMBERS’ EQUITYFOR THE YEARS ENDED SEPTEMBER 30, 2016 & 2015

$116,020

–

––––

116,020

–

––––

$116,020

$115,890

–

–170

––

116,060

–

–980

––

$117,040

$38,128,854

3,602,608

––

64,293(2,593,183)

39,202,572

2,846,538

––

103,022(2,653,877)

$39,498,255

$36,327,882

–

3,313,401––

(2,593,183)

37,048,100

–

3,818,728––

(2,653,877)

$38,212,951

$1,800,972

3,602,608

(3,313,401)–

64,293–

2,154,472

2,846,538

(3,818,728)–

103,022–

$1,285,304

$3,602,608

2,717,447

(1,108,218)8,346

179,211116,756

1,177,777 298,241 687,442

(134,081) 15,817

(75,913) 7,485,433

(4,623,487)

(16,919)510,018

(4,130,388)

17,887,267

(17,361,446)

64,463 (2,593,183)

(2,002,899)

1,352,146 1,737,357

$3,089,503

CASH FLOW FROM OPERATING ACTIVITIESNet margins Adjustments to reconcile net margins to net cash provided by operating activities: Depreciation and amortization Noncash capital credits Loss on disposition of property Changes in assets and liabilities: Accounts, notes and other receivables (net) Materials and supplies Other assets Deferred charges Accounts payable Accrued taxes and other liabilities Consumer deposits Accrued postretirement benefits Net cash provided by operating activities

CASH FLOW FROM INVESTING ACTIVITIESExtension and replacement of plant, net of salvage and removal costs Investment in nonutility property Proceeds from redemption of capital credits Net cash used by investing activities

CASH FLOW FROM FINANCING ACTIVITIESProceeds from long-term debt Payments on long-term debt Proceeds and reclassifications of patronage capital and memberships (net) Patronage capital credits retired Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

2015

STATEMENTS OF CASH FLOWFOR THE YEARS ENDED SEPTEMBER 30, 2016 & 2015

2016

$2,846,538

2,638,826

(1,526,637)10,366

(88,196)(64,112)

(163,554) (248,759) (202,783)349,480

25,3745,100

3,581,643

(4,179,611)

(66,466)545,684

(3,700,393)

3,107,000

(1,263,466)

104,002(2,653,877)

(706,341)

(825,091) 3,089,503

$2,264,412

To the Board of TrusteesButler Rural Electric Cooperative, Inc.Oxford, Ohio

Report on the Financial StatementsWe have audited the accompanying financial statements of Butler Rural Electric Cooperative, Inc., which comprise the balance sheets as of September 30, 2016 and 2015, and the related statements of revenue and expenses, changes in members’ equity, and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial StatementsManagement 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 ResponsibilityOur 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.

OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Butler Rural Electric Cooperative, Inc. as of September 30, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Report on Other Legal and Regulatory RequirementsIn accordance with Government Auditing Standards, we have issued our report dated November 25, 2016, on our consideration of Butler Rural Electric Cooperative, Inc.'s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, 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 and in considering Butler Rural Electric Cooperative, Inc.’s internal control over financial reporting and compliance.

Circleville, OhioNovember 25, 2016

INDEPENDENT AUDITOR’S REPORT