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# UNITED STATES DEPARTMENT OF AGRICULTURE

## Rural Utilities Service

# 

**BULLETIN 1773-1**

**SUBJECT: [Policy on Audits of RUS Borrowers]{.underline}**

**TO:** RUS Electric and Telecommunications Borrowers

Certified Public Accountants

**EFFECTIVE DATE:** July 5, 2001

**OFFICE OF PRIMARY INTEREST:** Technical Accounting and Auditing Staff,
Program Accounting and Services Division

**AVAILABILITY**: This is a new bulletin and is available on the RUS web
site at [http:///www.usda.gov/rus/ruswide.htm]()

**PURPOSE:** This bulletin sets forth, in a more user-friendly format,
the codified policies and procedures found in Title 7 CFR Part 1773, RUS
Policy on Audit of RUS Borrowers. This bulletin also includes sample
reports and schedules previously codified in Appendices A through D of
Part 1773, but now will be available only in this bulletin.

![](media/image2.wmf){width="2.946527777777778in"
height="0.6131944444444445in"} July 19, 2001

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Blaine D. Stockton Date

Acting Administrator

**TABLE OF CONTENTS**

**PART 1773-POLICY ON AUDITS OF RUS BORROWERS**

**Subpart A - General Provisions**

Sec.

1773.1 General. 4

1773.2 Definitions. 5

**Subpart B - RUS Audit Requirements**

1773.3 Annual audit. 7

1773.4 Borrower responsibilities. 8

1773.5 Qualifications of CPA. 10

1773.6 Auditor communications. 12

1773.7 Audit standards. 13

1773.8 Audit date. 14

1773.9 Disclosure of irregularities and illegal acts. 15

1773.10 Access to audit-related documents. 16

1773.11-1773.19 \[Reserved\]

**Subpart C - RUS Requirements for the Submission and Review of the
Auditor\'s Report, Report on Compliance and on Internal Controls over
Financial Reporting, and Management Letter**

1773.20 CPA\'s submission of the auditor\'s report, report on
compliance,

report on compliance and on internal controls over financial

reporting, and management letter. 16

1773.21 Borrower\'s review and submission of the auditor\'s report,
report on

compliance and on internal controls over financial reporting, and

management letter. 17

1773.22-1773.29 \[Reserved\]

**Subpart D - RUS Reporting Requirements**

1773.30 General. 18

1773.31 Auditor\'s report. 19

1773.32 Report on compliance and on internal controls over financial
reporting. 19

1773.33 Management letter. 20

1773.34-1773.37 \[Reserved\]

**Subpart E - RUS Required Audit Procedures and Documentation**

1773.38 Scope of engagement. 23

1773.39 Utility plant and accumulated depreciation. 23

1773.40 Regulatory assets. 27

1773.41 Extraordinary retirement losses. 27

1773.42 Clearing accounts. 27

1773.43 Capital and equity accounts. 27

1773.44 Long-term debt. 28

1773.45 Regulatory liabilities. 28

1773.46-1773.49 \[Reserved\]

###### Appendix A -- Sample Auditor\'s Reports for an Electric Cooperative

Exhibit 1 -- Sample Auditor's Report 30

Exhibit 2 -- Sample Report on Compliance and on Internal Control

> Over Financial Reporting, No Reportable Conditions Identified 31

Exhibit 3 -- Sample Report on Compliance and on Internal Control

> Over Financial Reporting, Reportable Conditions Identified 33

Exhibit 4 -- Sample Financial Statements 35

Exhibit 5 -- Illustrative Independent Auditor's Management Letter for

> Electric Borrowers 47

**Appendix B -- Sample Auditor\'s Reports for a Class A or B Commercial
Telecommunications Company**

Exhibit 1 -- Sample Auditor's Report 53

Exhibit 2 -- Sample Report on Compliance and on Internal Control

> Over Financial Reporting, No Reportable Conditions Identified 54

Exhibit 3 -- Sample Report on Compliance and on Internal Control

> Over Financial Reporting, Reportable Conditions Identified 56

Exhibit 4 -- Sample Financial Statements 58

Exhibit 5 -- Illustrative Independent Auditor's Management Letter for

> Telecommunications Borrowers 71

##### 

##### INDEX:

**ACCOUNTING**

Policy on Audits

**AUDITS**

*Every effort has been made to ensure the accuracy of this document,
however, in case of discrepancies, the printed version available from
the Government Printing Office, is the authoritative source.*

##### Subpart A - General Provisions

**§ 1773.1 General.**

\(a\) This part implements those standard provisions of the security
instrument utilized by the Rural Utilities Service (RUS) for both
electric and telecommunications borrowers and by the Rural Telephone
Bank (RTB) for its telecommunications borrowers. The provisions require
borrowers to prepare and furnish to RUS, at least once during each
12-month period, a full and complete report of its financial condition,
operations, and cash flows, in form and substance satisfactory to RUS,
audited and certified by an independent certified public accountant
(CPA), satisfactory to RUS, and accompanied by a report of such audit,
in form and substance satisfactory to RUS.

\(b\) This part 1773 applies to both RUS and RTB borrowers. For the
purposes of RTB borrowers, as used in this part 1773, *RUS* means *RTB*
and *Administrator* means *Governor* unless the text indicates
otherwise.

\(c\) This part complies with the 1994 revision of *Government Auditing
Standards*, issued by the Comptroller General of the United States,
United States General Accounting Office, including amendments dated May
13, 1999, and July 30, 1999.

\(d\) An auditor\'s report, report on compliance and on internal control
over financial reporting, and management letter are required to meet the
reporting provisions of the RUS security instrument.

\(1\) The auditor\'s report must state that the audit was conducted in
accordance with generally accepted government auditing standards
(GAGAS).

\(2\) The management letter must state that the audit was conducted in
accordance with this part.

\(3\) A report of the audit, in form and substance satisfactory to RUS,
cannot be issued unless and until an audit has been performed in
accordance with GAGAS and this part.

\(4\) A borrower is in violation of provisions of its security
instrument with RUS if the borrower fails to provide an audit performed
in compliance with GAGAS and this part. RUS security instruments
normally provide for notice and an opportunity to cure such violations
before RUS can exercise certain remedies.

\(5\) A report prepared in connection with a review or compilation of
financial statements, as defined in Statement of Standards for
Accounting and Review Services No. 1, Compilation and Review of
Financial Statements, does not satisfy the requirements of the RUS
security instrument.

\(6\) A report, as described in Statement on Auditing Standards (SAS)
No. 62, entitled \"Special Reports\", or in SAS No. 75, entitled
\"Engagements to Apply Agreed-upon Procedures to Specified Elements,
Accounts, or Items of a Financial Statement\", does not satisfy the RUS
loan security instrument requirements.

\(7\) An annual report containing audited financial statements does not
satisfy the RUS security instrument requirements.

\(e\) This part further implements those provisions of the standard RUS
security instrument by setting forth the criteria for CPAs to be deemed
satisfactory to RUS and the audit procedures and documentation standards
that must be performed before a report of the audit satisfactory to RUS
can be prepared and issued.

**§ 1773.2 Definitions.**

As used in this part:

***AA-PARA*** means Assistant Administrator, Program Accounting and
Regulatory Analysis.

***Administrator*** means the Administrator of RUS and, as provided in
§ 1773.1 (b), *Governor*.

***AICPA*** means the American Institute of Certified Public
Accountants.

***Audit*** means an examination of financial statements by an
independent CPA for the purpose of expressing an opinion on the fairness
with which those statements present financial position, results of
operations, and changes in cash flows in conformity with generally
accepted accounting principles (GAAP) and for determining whether the
borrower has complied with applicable laws, regulations, and contracts
for those transactions and events reflected in the financial statements.

***Borrower*** means an entity that has an outstanding RUS, RTB, or FFB
loan or loan guarantee, or that has received a grant for electric,
telecommunications, distance learning, or telemedicine purposes under
the act.

***CPA*** means certified public accountant. The terms *CPA* and *CPA
firm* are used interchangeably.

***FFB*** means the Federal Financing Bank, an instrumentality and
wholly owned corporation of the United States.

***Fraud*** has the same meaning prescribed in SAS No. 82, entitled
\"Consideration of Fraud in Financial Statements".

***GAAP*** means generally accepted accounting principles.

***GAGAS*** means generally accepted government auditing standards as
set forth in *Government Auditing Standards*, Standards for Audit of
Governmental Organizations, Programs, Activities, and Functions, issued
by the Comptroller General of the United States.

***GAO*** means the General Accounting Office.

***Governor*** means the Governor of the RTB.

***Illegal act*** has the meaning prescribed in SAS No. 54, entitled
\"Illegal Acts by Clients\".

***OIG*** means the Office of Inspector General, United States
Department of Agriculture.

***OMB*** means the Office of Management and Budget.

***PASD*** means the Program Accounting Services Division of RUS.

***Regulatory asset*** means an asset resulting from an action of a
regulator as prescribed in Statement of Financial Accounting Standards
(SFAS) No. 71, entitled \"Accounting for the Effects of Certain Types of
Regulation\".

***Regulatory liability*** means a liability imposed on a regulated
enterprise by an action of a regulator as prescribed in SFAS No. 71,
entitled \"Accounting for the Effects of Certain Types of Regulation\".

***Related party*** has the meaning prescribed in SFAS No. 57, entitled
\"Related Party Disclosures\".

***Related party transaction*** has the meaning prescribed in SFAS No.
57, entitled \"Related Party Disclosures\".

***Reportable condition*** has the meaning prescribed in SAS No. 60,
entitled \"Communication of Internal Control Structure Related Matters
Noted in an Audit\".

***RTB*** means the Rural Telephone Bank.

***RUS*** means the Rural Utilities Service, an agency of the United
States Department of Agriculture established pursuant to Section 232 of
the Federal Crop Insurance Reform and Department of Agriculture
Reorganization Act of 1994 (Pub. L. 103-354, 108 Stat. 3178), successor
to REA with respect to administering certain electric and
telecommunications programs. See 7 CFR 1700.1.

***RUS Bulletin 1773-1*, Policy on Audits of RUS Borrowers**, is a
publication prepared by RUS that contains the RUS regulation 7 CFR part
1773 and exhibits of sample audit reports, financial statements, and a
management letter used in preparing audits of RUS borrowers. This
bulletin is available from USDA, Rural Utilities Service, Program
Development and Regulatory Analysis, 1400 Independence Ave., SW, Stop
1522, Washington, DC 20250, or available on the internet at
http://www.usda.gov/rus.

***SAS*** means Statement on Auditing Standards as prescribed by the
AICPA.

***SEC Practice Section*** means the Securities and Exchange Commission
Practice Section of the AICPA.

***SFAS*** means Statements of Financial Accounting Standards as
prescribed by the Financial Accounting Standards Board.

***State*** means any state or territory of the United States, or the
District of Columbia.

***Uniform System of Accounts*** means, for telecommunications
borrowers, the Uniform System of Accounts for Telecommunications
Companies, prescribed by the Federal Communications Commission and set
forth at 47 CFR Part 32, as supplemented by RUS pursuant to 7 CFR Part
1770, Accounting Requirements for RUS Telecommunications Borrowers,
subpart B, Uniform System of Accounts, and, for electric borrowers, as
contained in 7 CFR Part 1767, Accounting Requirements for RUS Electric
Borrowers, subpart B, Uniform System of Accounts.

**Subpart B - RUS Audit Requirements**

**§ 1773.3 Annual audit.**

\(a\) Each borrower must have its financial statements audited annually
by a CPA selected by the borrower and approved by RUS as set forth in
§ 1773.4.

\(b\) Each borrower must establish an annual as of audit date within
twelve months of the date of receipt of the first advance of funds from
grants and insured and guaranteed loans approved by RUS and RTB and must
prepare financial statements as of the date established.

\(c\) Until all loans made or guaranteed by RUS have been repaid, the
borrower must furnish three copies of the auditor\'s report, report on
compliance and on internal control over financial reporting, and
management letter to RUS within 120 days of the as of audit date.

\(d\) A borrower that qualifies as a unit of state or local government
or Indian tribe as such terms are defined in the Single Audit Act of
1984 (31 U.S.C. 7501 et seq.), the Single Audit Act Amendments of 1996
(31 U.S.C. 7505 et seq.) and OMB Circular A-133, Audits of States, Local
Governments, and Non-Profit Organizations (copy available from the
Executive Office of the President, Publication Services, 725 17^th^ St.,
NW, Suite 2200 Washington, DC 20502; 202-395-7332), must comply with
this part as follows:

\(1\) A borrower that expends \$300,000 or more in a year in Federal
awards, must have an audit performed and submit an auditor\'s report
meeting the requirements of the Single Audit Act of 1984 and the Single
Audit Act Amendments of 1996.

\(2\) A borrower that expends less than \$300,000 in Federal awards
during the year must have an audit performed in accordance with the
requirements of this part.

\(3\) A borrower must notify RUS, in writing, within 30 days of the as
of audit date, of the total Federal awards expended during the year and
must state whether it will have an audit performed in accordance with
the Single Audit Act of 1984 and the Single Audit Act Amendments of
1996, or this part.

\(i\) A borrower that elects to comply with this part must select a CPA
that meets the qualifications set forth in § 1773.5.

\(ii\) If an audit is performed in accordance with the Single Audit Act
of 1984 and the Single Audit Act Amendments of 1996, an auditor\'s
report that meets the requirements of the Single Audit Act of 1984 and
the Single Audit Act Amendments of 1996 will be sufficient to satisfy
that borrower\'s obligations under this part.

\(e\) OMB Circular A-133, Audits of States, Local Governments, and
Non-Profit Organizations, does not apply to audits of RUS electric and
telecommunications cooperatives and commercial telecommunications
borrowers.

**§ 1773.4 Borrower responsibilities.**

\(a\) *Selection of a qualified CPA*. The borrower\'s board of directors
is responsible for the selection of a qualified CPA that meets the
requirements set forth in § 1773.5. When selecting a CPA, the borrower
should consider, among other matters:

\(1\) The qualifications of CPAs available to do the work;

\(2\) The CPA\'s experience in performing audits of utilities; and

\(3\) The CPA\'s ability to complete the audit and submit the reports
and management letter within 90 days of the as of audit date.

\(b\) *Board approval of selection*. The board\'s approval of a CPA must
be recorded by a board resolution that states:

\(1\) The CPA meets RUS\' qualifications to perform an audit; and

\(2\) The borrower and CPA will enter into an audit agreement in
accordance with § 1773.6.

\(c\) *Notification of selection*. When the initial selection or
subsequent change of a CPA by a borrower has been made, the borrower
must notify RUS, in writing, at least 90 days prior to the as of audit
date.

\(1\) RUS will notify the borrower, in writing, within 30 days of the
date of receipt of such notice, if the selection or change in CPA is not
satisfactory.

\(2\) Notification to RUS that the same CPA has been selected for
succeeding audits of the borrower\'s financial statements is not
required; however, the procedures outlined in this part must be followed
for each new CPA selected, even though such CPA may previously have been
approved by RUS to audit records of other RUS borrowers. Changes in the
name of a CPA firm are considered to be a change in the CPA.

\(d\) *Audit engagement letter*. The borrower must enter into an audit
engagement letter with the CPA that complies with § 1773.6.

\(e\) *Debarment certification*. The borrower is responsible for the
receipt, from the selected CPA, of a lower tier covered transaction
certification, as required under the provisions of Executive Orders
12549 and 12689, Debarment and Suspension, and any rules or regulations
issued thereunder.

\(f\) *Submission of auditor\'s report*. The borrower must submit to RUS
the required auditor\'s report, report on compliance and on internal
control over financial reporting, and management letter as set forth in
§ 1773.21.

\(1\) An annual auditor\'s report, report on compliance and on internal
control over financial reporting, and management letter that fail to
meet the requirements detailed in this part will be returned to the
borrower with a written explanation of noncompliance.

\(2\) The borrower must, within 60 days of the date of the letter
detailing the noncompliance, submit corrected reports to RUS.

\(3\) If corrected reports are not received within 60 days of the date
of the letter detailing the noncompliance, RUS may notify the borrower
that a default has occurred under its security instrument or take other
appropriate action. The default notice will set forth the period of time
during which the default will be remedied.

\(g\) *Submission of plan of corrective action*. The borrower must
submit written comments to RUS on the findings and recommendations in
the auditor\'s report, report on compliance and on internal control over
financial reporting, and management letter. The borrower must also
submit to RUS:

\(1\) A written plan for corrective action taken or planned; and

\(2\) Comments on the status of corrective action taken on previously
reported findings and recommendations. If corrective action is not
necessary, a written statement describing the reason it is not should
accompany the auditor\'s report.

**§ 1773.5 Qualifications of CPA.**

For purposes of the RUS standard security instrument, any CPA that meets
the qualifications criteria of this section and enters into an audit
agreement with the borrower that complies with § 1773.6, will be
considered satisfactory to RUS.

\(a\) *Certification*. The accountant that audits the financial
statements of an RUS borrower must be a CPA in good standing of some
state. The CPA does not have to be licensed by the state in which the
borrower is located; however, the CPA must abide by the rules and
regulations of professional conduct promulgated by the accountancy board
of the state in which the borrower is located.

\(b\) *Independence*. The CPA must be independent. A CPA will be
considered independent if the CPA:

\(1\) Meets the standards for independence contained in the AICPA Code
of Professional Conduct in effect at the time the CPA\'s independence is
under review;

\(2\) Does not have and has not had any direct financial interest or any
material indirect financial interest in the borrower during the period
covered by the audit; and

\(3\) Is not and was not, during the period under audit, connected with
the borrower as a promoter, underwriter, trustee, director, officer, or
employee.

\(c\) *Peer review requirement*. The CPA must belong to and participate
in a peer review program, and must have undergone a satisfactory peer
review of the accounting and audit practice conducted by an approved
peer review program under paragraph (c)(4) of this section, unless a
waiver is granted under paragraph (c)(6) of this section. The reviewing
organization must not be affiliated with or have had its most recent
peer review conducted by the organization currently being reviewed
(reciprocal reviews). After the initial peer review has been performed,
the CPA must undergo a peer review of the accounting and audit practice
within 36 months of the issuance of the previous peer review or such
additional times as designated by the peer review executive committee.

\(1\) A CPA that receives an unqualified peer review report will be
satisfactory to RUS provided that the CPA meets the other criteria set
forth in this section.

\(2\) If a CPA receives a qualified or adverse peer review report, the
CPA must undergo a second peer review within 18 months of the date of
the qualified or adverse report. A CPA that receives an unqualified
second peer review report will be satisfactory to RUS provided that the
CPA meets the other criteria set forth in this section.

\(3\) A CPA that receives a second qualified or adverse peer review
report will not be satisfactory to RUS.

\(4\) Approved peer review programs. The following peer review programs
are approved by RUS:

\(i\) The peer review programs conducted by the AICPA;

\(ii\) The peer review program conducted by the regulated audit program
group of the National Conference of CPA Practitioners; and

\(iii\) An independent peer review program that, in RUS\' determination,
requires its members to:

\(A\) Ensure that the CPA can legally engage in the practice of
certified public accounting;

\(B\) Adhere to the quality control standards established by the AICPA;

\(C\) Submit to peer reviews of the CPA\'s accounting and audit practice
every 36 months or at such additional times as designated by its own
executive committee; and

\(D\) Ensure that all professionals in the firm, including CPAs and
nonCPAs, take part in the qualifying continuing professional education
requirements of GAGAS, as set forth in paragraphs (c)(4)(iii)(D)(*1*)
and (c)(4)(iii)(D)(*2*). A qualified continuing professional education
course is one that meets the standards of the AICPA.

(*1*) An auditor responsible for planning, directing, conducting, or
reporting on government audits must complete, every two years, at least
eighty hours of continuing education and training which contributes to
the auditor\'s professional proficiency. At least twenty hours must be
completed in any one year of the two-year period; and

(*2*) An individual responsible for planning, directing, and conducting
substantial portions of the field work, or reporting on the government
audit must complete at least 24 of the 80 hours of continuing education
and training in subjects directly related to the government environment
and to government auditing. If the audited entity operates in a specific
or unique environment, auditors must receive training that is related to
that environment.

\(5\) Submission of reports. The CPA must submit to the Assistant
Administrator, PARA, a copy of any peer review report and accompanying
letter of comment, if any, within 60 days of the date such report and
letter of comment are released by the peer review group.

\(i\) If the peer review report indicates that a follow-up review will
be made, the CPA must submit subsequent reports to the Assistant
Administrator, PARA, within 60 days of the date such reports are
released by the peer review group.

\(ii\) A peer review report must be submitted to the Assistant
Administrator, PARA, at least once every 36 months, or more frequently,
if required by the peer review program.

\(iii\) A copy of the peer review report, accompanying letter of
comment, and the partners\' inspections must be made available to OIG,
upon request.

\(6\) Waiver of the peer review requirement.

\(i\) A CPA may request that the Administrator, RUS, waive the peer
review requirement. To be eligible for a waiver, the following criteria
must be met:

\(A\) The firm has been in existence for less than 1 year from the date
of the request and has not been previously organized under a different
name;

\(B\) One of the partners organizing the firm has previously, within 18
months preceding the request, worked for a firm that has been peer
reviewed and the partner was partner-in-charge of audits of RUS
borrowers in the previous firm;

\(C\) The firm has enrolled in an approved peer review program; and

\(D\) The firm agrees to have the peer review conducted within 18 months
of the date of the RUS waiver.

\(ii\) Waiver requests must address each of the criteria in paragraph
(c)(6)(i) of this section and should be submitted to the Assistant
Administrator, Program Accounting and Regulatory Analysis.

**§ 1773.6 Auditor communication.**

\(a\) During the planning stages of a financial statement audit, GAGAS
and AICPA standards require the auditor to communicate certain
information regarding the nature and extent of testing and reporting on
compliance with laws and regulations and internal control over financial
reporting. The communication must include the nature of any additional
testing of compliance and internal control required by laws and
regulations or otherwise requested, and whether the auditors are
planning to provide opinions on compliance with laws and regulations and
internal control over financial reporting. This communication must take
the form of an audit engagement letter prepared by the CPA and formally
accepted by the board of directors or an audit committee representing
the board of directors. The engagement letter must also encompass those
items prescribed in SAS 84, entitled "Establishing an Understanding with
the Client". It must also include the following:

\(1\) The borrower and the CPA acknowledge that the audit is being
performed and the auditor\'s report, report on compliance and on
internal control over financial reporting, and management letter are
being issued in order to enable the borrower to comply with the
provisions of RUS\' security instrument;

\(2\) The borrower and CPA acknowledge that RUS will consider the
borrower to be in violation of its security instrument with RUS if the
borrower fails to have an audit performed and documented in compliance
with GAGAS and this part;

\(3\) The CPA represents that he/she meets the requirements under this
part to be satisfactory to RUS;

\(4\) The CPA will perform the audit and will prepare the auditor\'s
report, report on compliance and on internal control over financial
reporting, and management letter in accordance with the requirements of
this part;

\(5\) The CPA will document the audit work performed in accordance with
GAGAS, the professional standards of the AICPA, and the requirements of
this part;

\(6\) The CPA will make all audit-related documents, including
auditor\'s reports, workpapers, and management letters available to RUS
or its representatives (OIG and GAO), upon request, and will permit the
photocopying of all audit-related documents; and

\(7\) The CPA will follow the requirements of reporting fraud and
illegal acts as outlined in § 1773.9.

\(b\) The audit agreement may include such additional terms and
conditions as the CPA and borrower deem appropriate, including, but not
limited to:

\(1\) The CPA will report all audit findings to the board of directors
as required in § 1773.20(b); and

\(2\) The auditor\'s report, report on compliance and on internal
controls over financial reporting, and management letter with copies for
transmittal to RUS, and supplemental lenders, if applicable, will be
submitted to the borrower\'s board of directors within 90 days of the as
of audit date;

\(c\) A copy of the audit agreement must be available at the borrower\'s
office for inspection by RUS personnel. One copy of the current audit
agreement must be maintained in the CPA\'s workpapers or permanent file.

**§ 1773.7 Audit standards.**

\(a\) The audit must be performed in accordance with GAGAS and this
part. The audit must be performed in accordance with GAGAS in effect at
the audit date unless the borrower is directed otherwise, in writing, by
RUS.

\(b\) The audit must include such tests of the accounting records and
such other auditing procedures that are sufficient to enable the CPA to
express an opinion on the financial statements and to issue the required
reports on compliance and on internal control over financial reporting
and the management letter.

\(c\) Audit scope limitation.

\(1\) The borrower will not limit the scope of the audit to the extent
that the CPA is unable to meet RUS\' audit requirements or to provide an
unqualified opinion that the financial statements are presented fairly
in conformity with GAAP.

\(2\) The security instrument provision requiring the submission of a
report of the audit is not satisfied if the CPA must qualify the opinion
in the auditor\'s report due to limitations placed on the scope of the
audit by the borrower.

\(3\) If the CPA determines during the audit that an unqualified opinion
cannot be issued due to a scope limitation imposed by the borrower, the
CPA should use professional judgment to determine what levels of the
borrower\'s management should be informed.

\(4\) After informing the borrower\'s management, if the scope
limitation is not adequately resolved, the CPA should immediately
contact the AA-PARA, RUS, U.S. Department of Agriculture, Washington, DC
20250-1523. The AA-PARA will endeavor to resolve the matter with the
borrower.

**§ 1773.8 Audit date.**

\(a\) The annual audit must be performed as of the end of the same
calendar month each year unless prior approval to change the as of audit
date is obtained, in writing, from RUS.

\(1\) A borrower may request a change in the as of audit date by writing
to the AA-PARA at least 60 days prior to the newly requested as of audit
date.

\(2\) The time period between the prior as of audit date and the newly
requested as of audit date must be no longer than twenty-four months.
For example, a borrower that wishes to change its as of audit date from
December 31, 20X1, to June 30, must make the change effective no later
than June 30, 20X3.

\(b\) Comparative financial statements must be prepared and audited for
the twelve months ending as of the new audit date and for the twelve
months immediately preceding that period.

\(c\) A borrower that changes its as of audit date from December 31,
20X1, to June 30, 20X3, must have the CPA report on statements in the
following manner:

+-----------------------------------+-----------------------------------+
| ## Previously Issued Statements   | Statements Prepared as of New     |
|                                   | Audit Date                        |
+-----------------------------------+-----------------------------------+
| 12/31/20X1; 12/31/20X0            | 6/30/20X3; 6/30/20X2              |
| (Statements need not be reissued) |                                   |
+-----------------------------------+-----------------------------------+

**§ 1773.9 Disclosure of fraud, illegal acts, and other noncompliance.**

\(a\) In accordance with GAGAS, the auditor must design the audit to
provide reasonable assurance of detecting fraud that is material to the
financial statements and material misstatement resulting from direct and
material illegal acts, and noncompliance with the provisions of
contracts or grant agreements that could have a direct and material
effect on financial statement amounts.

\(b\) If specific information comes to the auditor's attention that
provides evidence concerning the existence of possible illegal acts that
could have a material indirect effect on the financial statement or
material noncompliance with the provisions of contracts or grant
agreements that could have a material indirect effect on the financial
statements, auditors should apply audit procedures specifically directed
to ascertaining whether an illegal act or noncompliance with provisions
of contract or grant agreements has occurred.

\(c\) Pursuant to the terms of its audit engagement letter with the
borrower, the CPA must immediately report, in writing, all instances of
fraud and all indications or instances of illegal acts, whether material
or not, to:

\(1\) The president of the borrower\'s board of directors;

\(2\) The Assistant Administrator, PARA; and

\(3\) OIG, as follows:

\(i\) For the States of Delaware, District of Columbia, Maryland,
Pennsylvania, Virginia, West Virginia, Connecticut, Maine,
Massachusetts, New Hampshire, New Jersey, New York, Puerto Rico, Rhode
Island, Vermont and the Virgin Islands, report to USDA-OIG-Audit,
Northeast Region, Regional Inspector General, 6505 Belcrest Road, room
428-A, Hyattsville, Maryland 20782;

\(ii\) For the States of Alabama, Florida, Georgia, Kentucky,
Mississippi, North Carolina, South Carolina, and Tennessee, report to
USDA-OIG-Audit, Southeast Region, Regional Inspector General, 401 W.
Peachtree Street, NW., room 2328, Atlanta, Georgia 30365-3520;

\(iii\) For the States of Illinois, Indiana, Michigan, Minnesota, Ohio,
and Wisconsin, report to USDA-OIG-Audit, Midwest Region, Regional
Inspector General, 111 N. Canal Street, Suite 1130, Chicago, Illinois
60606;

\(iv\) For the States of Arkansas, Louisiana, New Mexico, Oklahoma, and
Texas, report to USDA-OIG-Audit, Southwest Region, Regional Inspector
General, 101 South Main, room 324, Temple, Texas 76501;

\(v\) For the States of Colorado, Iowa, Kansas, Missouri, Montana,
Nebraska, North Dakota, South Dakota, Wyoming, and Utah, report to
USDA-OIG-Audit, Great Plains Region, Regional Inspector General, P.O.
Box 293, Kansas City, Missouri 64141; and

\(vi\) For the States of Alaska, Arizona, California, Hawaii, Idaho,
Nevada, Oregon, Territory of Guam, Trust Territories of Pacific, and
Washington, report to USDA-OIG-Audit, Western Region, Regional Inspector
General, 555 Battery Street, room 511, San Francisco, California 94111.

**§ 1773.10 Access to audit-related documents.**

Pursuant to the terms of the audit agreement, the CPA must make all
audit-related documents, including auditors\' reports, workpapers, and
management letters available to RUS, or its designated representative,
upon request and must permit RUS, or its designated representative, to
photocopy all audit-related documents.

**§§ 1773.11-1773.19 \[Reserved\]**

Subpart C - RUS Requirements for the Submission and Review of the
Auditor\'s Report, Report on Compliance and on Internal Control over
Financial Reporting, and Management Letter

§ 1773.20 CPA\'s submission of the auditor\'s report, report on
compliance and on Internal controls over financial reporting, and
management letter.

\(a\) *Time limit*. As soon as possible after completion of the audit,
but within 90 days of the as of audit date, the CPA should deliver the
auditor\'s report, report on compliance and on internal control over
financial reporting, and management letter to the president of the
borrower\'s board of directors. As a minimum, copies should be provided
for each member of the board of directors and the manager. Further,
three copies must be provided to the borrower for transmittal to RUS.

\(b\) *Communication with the board of directors*. In addition to
providing sufficient copies of the auditor\'s report, report on
compliance and on internal control over financial reporting, and
management letter for each member of the borrower\'s board of directors,
RUS requires that the CPA report all audit findings to the borrower\'s
board of directors. RUS recommends that audit findings be communicated
orally; however, the communication may be oral or written, at the
borrower\'s discretion. If the information is communicated orally, the
CPA must document the communication by appropriate memoranda or
notations in the workpapers. If the CPA communicates in writing, a copy
of the written communication must be included in the CPA\'s audit
workpapers or permanent file.

\(c\) *Matters to be communicated*. Matters communicated to the board of
directors must include, but are not limited to the matters to be
communicated to the audit committee as prescribed in SAS No. 61,
entitled \"Communication with Audit Committee\",:

\(1\) The initial selection of and changes in significant accounting
policies;

\(2\) The methods used to account for significant or unusual
transactions and the effects of significant accounting policies in
controversial or emerging areas;

\(3\) The process utilized by management to formulate significant
accounting estimates and the basis for the CPA\'s conclusions regarding
the reasonableness of these estimates;

\(4\) Audit findings and recommendations, including audit adjustments
that either individually or in the aggregate have a significant effect
on the borrower\'s financial statements;

\(5\) The CPA\'s responsibility for other information presented with the
audited financial statements, any audit procedures performed, and the
results thereof;

\(6\) Any disagreements with management, whether or not satisfactorily
resolved, concerning matters that individually or in the aggregate may
be significant to the borrower\'s financial statements or the auditor\'s
report, report on compliance and on internal control over financial
reporting, or management letter;

\(7\) Significant matters that were the subject of consultations with
other accountants;

\(8\) Significant issues discussed with management with regard to the
initial or recurring retention of the CPA; and

\(9\) Any serious difficulties encountered in dealing with management
during the performance of the audit.

§ 1773.21 Borrower\'s review and submission of the auditor\'s report,
report on\
compliance and on internal control over financial reporting, and
management letter.

\(a\) The borrower\'s board of directors should note and record receipt
of the auditor\'s report, report on compliance and on internal control
over financial reporting, and management letter and any action taken in
response to the reports or management letter in the minutes of the board
meeting at which such reports and management letter are presented.

\(b\) The borrower must furnish RUS with three copies of the auditor\'s
report, report on compliance and on internal control over financial
reporting, and management letter within 120 days of the as of audit
date. Any provision in RUS\' security instrument that requires such
documents to be furnished to RUS in a shorter period of time may be
disregarded.

\(c\) The borrower must furnish RUS with three copies of its plan for
corrective action, if any, within 180 days of the as of audit date.

\(d\) The borrower must furnish RUS, within 120 days of the as of audit
date, with a copy of each special report, summary of recommendations or
similar communications, if any, received from the CPA as a result of the
audit.

\(e\) All required submissions to RUS described in paragraphs (a)
through (d) of this section should be sent to: Assistant Administrator,
Program Accounting and Regulatory Analysis, Stop 1523, 1400 Independence
Ave., SW, Washington, DC 20250-1523.

**§§ 1773.22.-1773.29 \[Reserved\]**

**Subpart D - RUS Reporting Requirements**

**§ 1773.30 General.**

\(a\) The CPA must prepare the following:

\(1\) An auditor\'s report, examples of which are set forth in
appendices A, exhibit 1 (Electric), and B, exhibit 1
(Telecommunications) of this Bulletin 1773-1;

\(2\) A report on compliance and on internal control over financial
reporting, examples of which are set forth in appendices A, exhibits 2
and 3 (Electric) and B,

exhibits 2 and 3 (Telecommunications) of this Bulletin 1773-1; and

\(3\) A management letter, an example of which is set forth in
appendices A, exhibit 5 (Electric), and B, exhibit 5
(Telecommunications) of this Bulletin 1773-1.

\(b\) The CPA should deliver the auditor\'s report, report on compliance
and on internal control over financial reporting, and management letter
(with copies as required in § 1773.20) to the borrower as soon as
possible after completion of the audit but not more than 90 days after
the as of audit date.

**§ 1773.31 Auditor\'s report.**

The CPA must prepare a written report on comparative balance sheets,
statements of revenue and patronage capital (or income and retained
earnings, depending upon the structure of the borrower) and statements
of cash flows. This report must be signed by the CPA, cover all
statements presented, and refer to the separate report on compliance and
on internal control over financial reporting issued in conjunction with
the auditor\'s report. The auditor's report should also state that the
report on compliance and on internal control over financial reporting is
an integral part of a GAGAS audit, and in considering the results of the
audit, this report should be read along with the auditors report on the
financial statements.

**§ 1773.32 Report on compliance and on internal control over financial
reporting.**

As required by GAGAS, the CPA must prepare a written report describing
the auditors testing of compliance with applicable laws, regulations,
contracts, and grants and on internal control over financial reporting
and present the results of those tests. This report must be signed by
the CPA and must include, as a minimum:

\(a\) The scope of the CPA's testing of compliance with laws and
regulations and internal control over financial reporting including
whether or not the tests performed provided sufficient evidence to
support an opinion on compliance or internal control over financial
reporting and whether the CPA is providing such opinions;

\(b\) If conditions believed to be material weaknesses considered to be
reportable conditions are disclosed, the report should identify the
material weaknesses that have come to the CPA's attention;

\(c\) If no reportable instances of non-compliance and no reportable
conditions were found, the CPA must issue a report as illustrated in
appendices A, exhibit 2 (Electric), and B, exhibit 2
(Telecommunications) of this Bulletin 1773-1;

\(d\) If material instances of noncompliance and reportable conditions
are identified, the CPA must issue a report as illustrated in appendices
A, exhibit 3 (Electric), and B, exhibit 3 (Telecommunications) of this
Bulletin 1773-1;

\(e\) Other nonmaterial instances of noncompliance should not be
disclosed in the report on compliance and on internal controls over
financial reporting, but should be reported in a separate communication
to the board of directors, preferably in writing. All such
communications must be documented in the workpapers and submitted to RUS
in compliance with section 1773.21.

\(f\) If the CPA has issued a separate letter detailing immaterial
instances of noncompliance, the report on compliance and on internal
controls over financial reporting must be modified to include a
statement such as:

*We noted certain immaterial instances of noncompliance, which we have
reported to the management of (borrower\'s name) in a separate letter
dated (Month, day, year).*

\(g\) If the CPA has issued a separate letter to the management to
communicate other matters involving the design and operation of the
internal control over financial reporting, the report on compliance and
on internal control over financial reporting must be modified to include
a statement such as:

*However, we noted other matters involving the internal control over
financial reporting that we have reported to the management of
(borrower's name) in a separate letter dated (month, day, year).*

\(h\) The report must contain the status of known but uncorrected
significant or material findings and recommendations from prior audits
that affect the current audit objective.

§ 1773.33 Management letter.

The CPA must prepare a management letter that includes, at a minimum,
comments on:

\(a\) *Audit procedures*. State whether the audit has been performed in
accordance with this part;

\(b\) *Special reports.* State whether any special reports, summaries of
recommendations, or similar communications were furnished to the
borrower\'s management during the course of the audit or during interim
audit work, and provide a description of the information furnished;

\(c\) *Accounting and records.* Comment on the adequacy and
effectiveness of the borrower\'s accounting procedures, discuss the
general condition of the records, and outline any recommendations for
improvement. Comment on the adequacy and fairness of the methods used in
accumulating and recording labor, material, and overhead costs, and the
distribution of these costs to construction, retirement, and maintenance
or other expense accounts, and where appropriate, include:

\(1\) Whether continuing property records (CPRs) have been established,
are updated on a current basis, at least annually, and are reconciled
with the controlling general ledger plant accounts;

\(2\) Whether construction clearing accounts are cleared promptly of
costs of completed construction to the proper classified plant accounts
and whether depreciation was accrued on such completed construction from
the date the plant was placed in service;

\(3\) Whether retirements of plant are currently and systematically
recorded and properly priced;

\(4\) Whether all costs associated with retirements of plant are
properly accounted for in the accumulated provision for depreciation
accounts and comment on any unusual charges or credits to such accounts;
and

\(5\) Whether RUS approval was obtained for the sale, lease or transfer
of capital assets secured under the mortgage when approval is required,
and whether proceeds from sale or lease of plant, material or scrap were
handled in conformance with RUS requirements.

\(d\) *Materials control*. Comment on the adequacy of the control over
materials and supplies.

\(e\) *Compliance with RUS loan and security instrument provisions.*
State whether the following provisions of RUS\' loan and security
instruments have been complied with:

\(1\) For electric borrowers, provisions relating to:

\(i\) The requirement for a borrower to obtain written approval of
mortgagees to enter into any contract for the management, operation, or
maintenance of the borrower's system if the contract covers all or
substantially all (90 percent) of the electric system. For purposes of
this part, the following contracts shall be deemed as requiring RUS
approval:

\(A\) Management contracts in which the borrower has contracted to have
another borrower or other entity manage its affairs;

\(B\) Management contracts in which the borrower has contracted to
manage another borrower or other utility system;

\(C\) Operations and maintenance contracts in which the borrower has
contracted to have another borrower or other entity operate and/or
maintain all or substantially all (90 percent) of the physical plant
facilities of the borrower;

\(D\) Operations and maintenance contracts in which the borrower has
contracted to operate and maintain the physical plant facilities of
another borrower or other utility system; and

\(ii\) The requirement for a borrower to prepare and furnish mortgagees
annual financial and statistical reports on the borrower\'s financial
condition and operations. For borrowers with a December 31 year end, the
CPA must state whether the information represented by the borrower as
having been submitted to RUS in its most recent December 31 RUS Form 7
or Form 12 is in agreement with the borrower\'s audited records. For
borrowers with a year-end other than December 31, the CPA must state
whether the information appears reasonable based upon the audit
procedures performed. If the borrower represents that an amended report
has been filed as of December 31, the comments must relate to the
amended report.

\(2\) For telecommunications borrowers, provisions relating to the
requirement for a borrower to obtain written approval of the mortgagees
to enter into:

\(i\) Any contract, agreement or lease between the borrower and an
affiliate other than as allowed under 7 CFR part 1744, subpart E;

\(ii\) The requirement for a borrower to prepare and furnish mortgagees
annual financial and statistical reports on the borrower\'s financial
condition and operations. For borrowers with a December 31 year end, the
CPA must state whether the information represented by the borrower as
having been submitted to RUS in its most recent December 31 RUS Form 479
is in agreement with the borrower\'s audited records. For borrowers with
a year end other than December 31, the CPA must state whether the
information appears reasonable based on the audit procedures performed.
If the borrower represents that an amended report has been filed as of
December 31, the comments must relate to the amended report.

\(f\) *Related party transactions*. State whether all material related
party transactions have been disclosed in the notes to the financial
statements in accordance with SFAS No. 57, entitled \"Related Party
Disclosures\". If the audit did not disclose any related party
transactions considered to be material, either individually or in the
aggregate, so state;

\(g\) *Depreciation rates.* For electric borrowers, comment when the
depreciation rates used in computing monthly accruals are not in
compliance with RUS requirements (See RUS Bulletin 183-1, Depreciation
Rates and Procedures), which require the use of depreciation rates that
are within the ranges established by RUS for each primary plant account,
or with the requirements of the State regulatory body having
jurisdiction over the borrower\'s depreciation rates; and

\(h\) *Deferred debits and deferred credits.* For electric borrowers,
provide a detailed analysis of the totals reported as deferred debits
and deferred credits, including, but not limited to, margin
stabilization plans, revenue deferral plans, and expense deferrals. The
CPA must state whether RUS has approved, in writing, each regulatory
asset and liability.

\(i\) *Investments*. For electric and telecommunications borrowers,
provide a detailed schedule of all investments in subsidiary and
affiliated companies accounted for on either the cost or equity basis.
This requirement includes investments in corporations, limited liability
corporations and partnerships, joint ventures, etc. For all investments
list the name of the entity, ownership percentage, and the principal
business in which the entity is engaged. For investments recorded on the
cost basis include the original investment, advances, dividends declared
or paid in the current and prior years and the net investment. For
investments recorded on the equity basis include the ownership
percentage, original investment, advances, and current and prior years'
earnings and losses, including accumulated losses in excess of the
original investment.

**§§ 1773.34-1773.37 \[Reserved\]**

**Subpart E - RUS Required Audit Procedures and Documentation**

**§ 1773.38 Scope of engagement.**

\(a\) RUS requires that the audit procedures set forth in §§ 1773.39
through 1773.45 be performed annually by the CPA during the audit of the
RUS borrowers\' financial statements, which audit procedures may be in
addition to the conduct of a GAGAS audit.

\(b\) The CPA must exercise professional judgment in determining whether
any auditing procedures in addition to those mandated by GAGAS or this
part should be performed in order to afford a reasonable basis for
rendering the auditor\'s report, report on compliance and on internal
control over financial reporting, and management letter.

**§ 1773.39 Utility plant and accumulated depreciation.**

\(a\) *General*. The audit of these accounts must include tests of
additions, replacements, retirements, and changes. Based upon the CPA\'s
determination of materiality, an appropriate sample of transactions must
be selected for testing. The CPA\'s workpapers must document that
he/she:

\(1\) Examined direct labor and material transactions to determine
whether the borrower\'s accounting records reflect a complete
accumulation of costs;

\(2\) Examined indirect costs and overhead charges to determine if they
conform to the Uniform System of Accounts;

\(3\) Reviewed the costs of completed construction and retirement
projects to determine if they were cleared promptly from the work in
progress accounts to the classified plant in service accounts and the
related depreciation reserves;

\(4\) Examined direct purchases of special equipment and general plant;

\(5\) Determined the degree of accuracy and control of costing
retirements, including tests of salvage and removal costs;

\(6\) Reviewed the borrower\'s work order procedures; and

\(7\) Reviewed depreciation rates for adequate support, compared them to
RUS guidelines, and determined if they are in compliance.

\(b\) *Construction work in progress.*

\(1\) The workpapers must include a summary of open work orders
reconciled to the general ledger. The CPA must note on the summary any
unusual or nontypical projects.

\(2\) Based upon the CPA\'s determination of materiality, an appropriate
sample of work orders must be selected for testing. The CPA\'s
workpapers must document that he/she:

\(i\) Reviewed equipment purchases charged to work orders, including
payments and receiving reports;

\(ii\) Reviewed contracts showing the scope of the work, the nature of
the contract, the contract amount, and scheduled payments and reviewed
supporting documents to determine that all services contracted for were
in fact rendered;

\(iii\) Reviewed time cards and pay rates for several employees who
allocate their time to work orders;

\(iv\) Reviewed the nature of material and supplies issued to the
project, traced amounts and quantities to supporting documents, and
reviewed the reasonableness of clearing rates for assignment of stores
expense to the work order;

\(v\) Reviewed the accuracy of the computation of overheads applied to
the work order; and

\(vi\) Reviewed other costs charged to the work order for support and
propriety.

\(3\) Based upon the CPA\'s determination of materiality, an appropriate
sample of completed contracts must be selected for testing. The CPA\'s
workpapers must document that he/she:

\(i\) Scheduled payments to contractors and traced to verify payments
and supporting invoices;

\(ii\) Traced contract costs to final closeout documents, to the general
ledger, and to the continuing property records; and

\(iii\) Verified the costs of owner furnished materials, if applicable.

\(4\) The CPA must review the borrower\'s procedures for unitization and
classification of work order and contract costs. Based upon the CPA\'s
determination of materiality, an appropriate sample of transactions must
be selected for testing. The CPA\'s workpapers must document that
he/she:

\(i\) Reviewed the tabulation of record units for construction from the
work order staking sheets to the tabulation of record units, to the
unitization sheets, and to the continuing property records;

\(ii\) Reviewed the procedures for unitizing and distributing costs of
completed construction to the plant accounts;

\(iii\) Verified that standard costs were being used;

\(iv\) Evaluated the basis for development of standard costs; and

\(v\) Determined that costs of completed construction were cleared
promptly from work in progress accounts.

\(c\) *Continuing property records.* Based upon the CPA\'s determination
of materiality, an appropriate sample of transactions must be selected
for testing. The CPA\'s workpapers must document that he/she:

\(1\) Determined whether the subsidiary plant records agree with the
controlling general ledger plant accounts;

\(2\) Noted differences in the workpapers; and

\(3\) Commented, in the management letter, on any discrepancies.

\(d\) *Retirement work-in-progress.* Based upon the CPA\'s determination
of materiality, an appropriate sample of transactions must be selected
for testing. The CPA\'s workpapers must document that he/she:

\(1\) Determined that plant retirements are currently and systematically
recorded and priced on the basis of the continuing property records, and
determined that costs of removal have been properly accounted for;

\(2\) Explained the method used in computing the cost of units of plant
retired if continuing property records have not been established and
determined whether costs appeared reasonable; and

\(3\) Determined the manner in which net losses due to retirements were
accounted for and traced clearing entries to the depreciation reserve,
the plant accounts, and the continuing property records.

\(e\) *Provision for accumulated depreciation.* The CPA\'s workpapers
must include an analysis of transactions. Based upon the CPA\'s
determination of materiality, an appropriate sample of transactions must
be selected for testing. The CPA\'s workpapers must document that
he/she:

\(1\) Verified the depreciation accruals for the period, including the
depreciation base;

\(2\) Reviewed the basis of the depreciation rates, any change in rates
and the reason therefor, and, if appropriate, determined whether the
rates are in compliance with RUS requirements or with the requirements
of the state regulatory body having jurisdiction over the borrower\'s
depreciation rates;

\(3\) Reviewed salvage and removal costs; and

\(4\) Searched for unrecorded retirements.

\(f\) *Other reserves*. The CPA\'s workpapers must include an account
analysis for all other material plant reserves, such as the reserve for
the amortization of plant acquisition adjustments. Based upon the CPA\'s
determination of materiality, an appropriate sample of transactions must
be selected for testing. The CPA\'s workpapers must document that
appropriate tests of transactions were performed.

\(g\) *Narrative*. The CPA must prepare and include in the workpapers a
comprehensive narrative on the scope of work performed, observations
made, and conclusions reached. Specific matters covered in this
narrative must include:

\(1\) The nature of construction and other additions;

\(2\) The control over, and the accuracy of pricing retirements;

\(3\) The accuracy of distributing costs to classified utility plant
accounts;

\(4\) An evaluation of the method of:

\(i\) Capitalizing the direct loadings on labor and material costs;

\(ii\) Distributing transportation costs and other expense clearing
accounts; and

\(iii\) Capitalizing overhead costs;

\(5\) The tests of depreciation;

\(6\) A review of agreements such as those relating to acquisitions,
property sales, and leases which affect the plant accounts; and

\(7\) Notations, if applicable, of RUS approval of property sales and
the propriety of the disposition of the proceeds.

**§ 1773.40 Regulatory assets.**

The CPA\'s workpapers must document whether all regulatory assets comply
with the requirements of SFAS No. 71. For electric borrowers only, the
CPA\'s workpapers must document whether all regulatory assets have
received RUS approval.

**§ 1773.41 Extraordinary retirement losses.**

The CPA\'s workpapers must contain an analysis of retirement losses,
including any required approval by a regulatory commission with
jurisdiction in the matter, or RUS, in the absence of commission
jurisdiction.

§ 1773.42 Clearing accounts.

The CPA\'s workpapers must contain an analysis of all clearing accounts.
Based upon the CPA\'s determination of materiality, an appropriate
sample of transactions should be selected for testing. The CPA\'s
workpapers must document that transactions were reviewed for proper
allocation between expense and capital accounts.

**§ 1773.43 Capital and equity accounts.**

\(a\) *Capital stock*. For privately owned companies, the workpapers
must include analyses of all stock transactions during the audit period.
Based upon the CPA\'s determination of materiality, an appropriate
sample of transactions must be selected for testing. The CPA\'s
workpapers must document that he/she:

\(1\) Reviewed the subsidiary records and reconciled them to the general
ledger control account;

\(2\) Reviewed authorizations and issuances or redemptions of capital
stock for proper approvals by the board of directors, stockholders, and
regulatory commissions;

\(3\) Determined that transactions were made in accordance with the
appropriate provisions of the articles of incorporation, bylaws, and RUS
loan documents; and

\(4\) Determined that transactions were recorded in accordance with the
Uniform System of Accounts.

\(b\) *Memberships*. For cooperative organizations, the workpapers must
include an analysis of the membership transactions during the audit
period. Based upon the CPA\'s determination of materiality, an
appropriate sample of transactions must be selected for testing. The
CPA\'s workpapers must document that he/she:

\(1\) Reviewed the subsidiary records and reconciled them to the general
ledger control account; and

\(2\) Determined that transactions were made in accordance with the
appropriate provisions of the articles of incorporation, bylaws, and RUS
loan documents.

\(c\) *Patronage capital, retained earnings, margins, and other
equities.* The workpapers must include an analysis of the patronage
capital, retained earnings, margins and other equities, and any related
reserve accounts. Based upon the CPA\'s determination of materiality, an
appropriate sample of transactions must be selected for testing. The
CPA\'s workpapers must document that he/she:

\(1\) Determined that the transactions were made in accordance with the
appropriate provisions of the articles of incorporation, bylaws, RUS
loan documents, Uniform System of Accounts, or orders of regulatory
commissions;

\(2\) Traced payments to underlying support; and

\(3\) Determined whether, under the terms of the RUS security
instrument, restrictions of retained earnings or margins are required
and, if so, whether they have been properly recorded.

**§ 1773.44 Long-term debt.**

The CPA\'s workpapers must document that he/she:

\(a\) Confirmed RUS, FFB, and RTB debt to the appropriate confirmation
schedule (RUS Form 690, Confirmation Schedule Obligation to the FFB as
of; or Form 691, Confirmation Schedule-Long-term Obligation to RUS as
of; or RTB Form 12, Confirmation Schedule);

\(b\) Confirmed other long-term debt directly with the lender;

\(c\) Examined notes executed or canceled during the audit period; and

\(d\) Tested accrued interest computations.

**§ 1773.45 Regulatory liabilities.**

The CPA\'s workpapers must document whether all regulatory liabilities
comply with the requirements of SFAS No. 71. For electric borrowers
only, the CPA\'s workpapers must document whether all regulatory
liabilities have received RUS approval.

**§§ 1773.46-1773.49 \[Reserved\]**

**APPENDIX A**

###### Sample Reports for an Electric Cooperative

Appendix A includes an example of an auditor\'s report, report on
compliance and on internal controls over financial reporting, financial
statements and accompanying notes, and management letter for an electric
distribution cooperative. The sample auditor\'s report is intended as a
guide only and, while it is recommended that the format be followed,
each auditor\'s report should be prepared to adequately cover the
circumstances. To the extent possible, it should be used as a guide in
preparing auditors\' reports for other types of electric borrowers. For
power supply borrowers and for distribution borrowers with production or
transmission plant, the same general format should be followed. However,
the Statement of Revenue and Patronage Capital must be expanded to show
separate totals for operations expenses and maintenance expenses for
each class of production plant and for transmission plant.

# Exhibit 1 - Sample Auditor\'s Report

Certified Public Accountants

1600 Main Street

City, State 24105

The Board of Directors

Center County Electric Energy Association, Inc.

*Independent Auditor\'s Report*

We have audited the accompanying balance sheets of Center County
Electric Energy Association, Inc. as of December 31, 20X1 and 20X0, and
the related statements of revenue and patronage capital, and cash flows
for the years then ended. These financial statements are the
responsibility of Center County Electric Energy Association, Inc.'s
management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audits in accordance with generally accepted auditing
standards 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 of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Center
County Electric Energy Association, Inc. as of December 31, 20X1 and
20X0, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.

In accordance with *Government Auditing Standards*, we have also issued
our report dated March 2, 20X2, on our consideration of Center County
Electric Energy Association, Inc.'s internal control over financial
reporting and our tests of its compliance with certain provisions of
laws, regulations, contracts and grants. That report is an integral part
of an audit performed in accordance with *Government Auditing Standards*
and should be read in conjunction with this report in considering the
results of our audit.

Certified Public Accountants

March 2, 20X2

Exhibit 2

Sample Report on Compliance and on Internal Control over Financial

Reporting, the CPA found No Reportable Instances of Noncompliance and No
Material Weaknesses (No Reportable Conditions Identified)

Certified Public Accountants

1600 Main Street

City, State 24105

The Board of Directors

Center County Electric Energy Association, Inc.

We have audited the financial statements of Center County Electric
Energy Association, Inc. as of and for the years ended December 31, 20X1
and 20X0, and have issued our report thereon dated March 2, 20X2. We
conducted our audits in accordance with generally accepted auditing
standards and the standards applicable to financial audits contained in
*Government Auditing Standards*, issued by the Comptroller General of
the United States.

# Compliance

As part of obtaining reasonable assurance about whether Center County
Electric Energy Association, Inc.'s financial statements are free of
material misstatement, we performed tests of its compliance with certain
provisions of laws, regulations, contracts, and grants, 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 that are required to be reported
under *Government Auditing Standards.* \[*If the CPA has issued a
separate letter to the management detailing immaterial instances of
noncompliance, modify this paragraph to include a statement such as the
following: However, we noted certain immaterial instances of
noncompliance which we have reported to the management of Center County
Electric Energy Association, Inc. in a separate letter dated March 2,
20X2*.\]

# Internal Control Over Financial Reporting

In planning and performing our audit we considered Center County
Electric Energy Association, Inc.\'s internal control over financial
reporting in order to determine our auditing procedures for the purpose
of expressing our opinion on the financial statements and not to provide
assurance on the internal control over financial reporting. Our
consideration of the internal control over financial reporting would not
necessarily disclose all matters in the internal control over financial
reporting that might be material weaknesses. A material weakness is a
condition in which the design or operation of one or more of the
internal control components does not reduce to a relatively low level
the risk that misstatements in amounts that would be material in
relation to the financial statements being audited may occur and not be
detected within a timely period by employees in the normal course of
performing their assigned functions. We noted no

matters involving the internal control over financial reporting and its
operation that we consider to be material weaknesses. \[*If the CPA has
issued a separate letter to management to communicate other matters
involving the design and operation of the internal control over
financial reporting, modify this paragraph to include a statement such
as the following: However, we noted other matters involving the internal
control over financial reporting which we have reported to the
management Center County Electric Energy Association,Inc. in a separate
letter dated March 2, 20X2*.\]

This report is intended solely for the information and use of the audit
committee, management, the Rural Utilities Service, 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

March 2, 20X2

##### Exhibit 3

**Sample Report on Compliance and on Internal Control over Financial**

**Reporting, the CPA Found Reportable Instances of Noncompliance and
Reportable Conditions Were Identified**

Certified Public Accountants

1600 Main Street

City, State 24105

The Board of Directors

Center County Electric Energy Association, Inc.

We have audited the financial statements of Center County Electric
Energy Association, Inc. as of and for the years ended December 31, 20X1
and 20X0, and have issued our report thereon dated March 2, 20X2. We
conducted our audit in accordance with generally accepted auditing
standards and the standards applicable to financial audits contained in
*Government Auditing Standards*, issued by the Comptroller General of
the United States.

### **Compliance**

As part of obtaining reasonable assurance about whether Center County
Electric Energy Association, Inc.\'s financial statements are free of
material misstatement, we performed tests of its compliance with certain
provisions of laws, regulations, contracts, and grants, 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 instances of noncompliance that are required to be reported
under *Government Auditing Standards*. \[*A description of the findings
should be included in the report*.\]\[*If the CPA has issued a separate
letter to the management detailing immaterial instances of
noncompliance, modify this paragraph to include a statement such as the
following: We also noted certain immaterial instances of noncompliance
which we have reported to the management Center County Electric Energy
Association, Inc. in a separate letter dated March 2, 20X2*.\]

### **Internal Control Over Financial Reporting**

In planning and performing our audit, we considered Center County
Electric Energy Association, Inc.\'s internal control over financial
reporting in order to determine our auditing procedures for the purpose
of expressing our opinion on the financial statements and not to provide
assurance on the internal control over financial reporting. However, we
noted certain matters involving the internal control over financial
reporting and its operation that we consider to be reportable
conditions. Reportable conditions involve matters coming to our
attention relating to significant deficiencies in the design or
operation of the internal control over financial reporting that, in our
judgment, could adversely affects Center County Electric Energy
Association, Inc.\'s ability to record,

process, summarize, and report financial data consistent with the
assertions of management in the financial statements. \[*A description
of the reportable conditions should be included in the report*.\]

A material weakness is a condition in which the design or operation of
one or more of the internal control components does not reduce to a
relatively low level the risk that misstatements in amounts that would
be material in relation to the financial statements being audited may
occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. Our consideration
of the internal control over financial reporting would not necessarily
disclose all matters in the internal control that might have reportable
conditions and, accordingly, would not necessarily disclose all
reportable conditions that are also considered to be material
weaknesses. However, we believe none of the reportable conditions
described above is a material weakness. \[*If conditions believed to be
material weaknesses are disclosed, the last sentence should be deleted
and instead the report should identify which of the reportable
conditions described above are considered to be material weaknesses.*\]
\[*If the CPA has issued a separate letter to management to communicate
other matters involving the design and operation of the internal control
over financial reporting, modify this paragraph to include a statement
such as the following: We also noted other matters involving the
internal control over financial reporting which we have reported to the
management of Center County Electric Energy Association, Inc. in a
separate letter dated March 2, 20X2*.\]

This report is intended solely for the information and use of the audit
committee, management, the Rural Utilities Service, 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

March 2, 20X2

### **EXHIBIT 4 -- SAMPLE FINANCIAL STATEMENTS**

+---+-----------------------------------------+------------+-----------+
| # |                                         |            |           |
|   |                                         |            |           |
| C |                                         |            |           |
| E |                                         |            |           |
| N |                                         |            |           |
| T |                                         |            |           |
| E |                                         |            |           |
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|   |                                         |            |           |
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| O |                                         |            |           |
| U |                                         |            |           |
| N |                                         |            |           |
| T |                                         |            |           |
| Y |                                         |            |           |
|   |                                         |            |           |
| E |                                         |            |           |
| L |                                         |            |           |
| E |                                         |            |           |
| C |                                         |            |           |
| T |                                         |            |           |
| R |                                         |            |           |
| I |                                         |            |           |
| C |                                         |            |           |
|   |                                         |            |           |
| E |                                         |            |           |
| N |                                         |            |           |
| E |                                         |            |           |
| R |                                         |            |           |
| G |                                         |            |           |
| Y |                                         |            |           |
|   |                                         |            |           |
| A |                                         |            |           |
| S |                                         |            |           |
| S |                                         |            |           |
| O |                                         |            |           |
| C |                                         |            |           |
| I |                                         |            |           |
| A |                                         |            |           |
| T |                                         |            |           |
| I |                                         |            |           |
| O |                                         |            |           |
| N |                                         |            |           |
|   |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
| B |                                         |            |           |
| A |                                         |            |           |
| L |                                         |            |           |
| A |                                         |            |           |
| N |                                         |            |           |
| C |                                         |            |           |
| E |                                         |            |           |
| S |                                         |            |           |
| H |                                         |            |           |
| E |                                         |            |           |
| E |                                         |            |           |
| T |                                         |            |           |
| S |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
|   |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
| D |                                         |            |           |
| E |                                         |            |           |
| C |                                         |            |           |
| E |                                         |            |           |
| M |                                         |            |           |
| B |                                         |            |           |
| E |                                         |            |           |
| R |                                         |            |           |
| 3 |                                         |            |           |
| 1 |                                         |            |           |
| , |                                         |            |           |
| 2 |                                         |            |           |
| 0 |                                         |            |           |
| X |                                         |            |           |
| 1 |                                         |            |           |
| a |                                         |            |           |
| n |                                         |            |           |
| d |                                         |            |           |
| 2 |                                         |            |           |
| 0 |                                         |            |           |
| X |                                         |            |           |
| 0 |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| A |                                         |            |           |
| S |                                         |            |           |
| S |                                         |            |           |
| E |                                         |            |           |
| T |                                         |            |           |
| S |                                         |            |           |
| ( |                                         |            |           |
| N |                                         |            |           |
| o |                                         |            |           |
| t |                                         |            |           |
| e |                                         |            |           |
| s |                                         |            |           |
| 1 |                                         |            |           |
| a |                                         |            |           |
| n |                                         |            |           |
| d |                                         |            |           |
| 2 |                                         |            |           |
| ) |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         | 20X1       | 20X0      |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| U |                                         |            |           |
| t |                                         |            |           |
| i |                                         |            |           |
| l |                                         |            |           |
| i |                                         |            |           |
| t |                                         |            |           |
| y |                                         |            |           |
| P |                                         |            |           |
| l |                                         |            |           |
| a |                                         |            |           |
| n |                                         |            |           |
| t |                                         |            |           |
| ( |                                         |            |           |
| N |                                         |            |           |
| o |                                         |            |           |
| t |                                         |            |           |
| e |                                         |            |           |
| 3 |                                         |            |           |
| ) |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Electric Plant in Service               | \$         | \$4       |
|   |                                         | 48,382,000 | 6,826,000 |
+---+-----------------------------------------+------------+-----------+
|   | Construction Work in Progress           | 2,040,000  | 1,586,000 |
+---+-----------------------------------------+------------+-----------+
|   | Total Utility Plant                     | 50,422,000 | 4         |
|   |                                         |            | 8,412,000 |
+---+-----------------------------------------+------------+-----------+
|   | Accumulated Provision for Depreciation  | 15,588,000 | 1         |
|   |                                         |            | 4,586,000 |
+---+-----------------------------------------+------------+-----------+
|   | Net Utility Plant                       | 34,834,000 | 3         |
|   |                                         |            | 3,826,000 |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| I |                                         |            |           |
| n |                                         |            |           |
| v |                                         |            |           |
| e |                                         |            |           |
| s |                                         |            |           |
| t |                                         |            |           |
| m |                                         |            |           |
| e |                                         |            |           |
| n |                                         |            |           |
| t |                                         |            |           |
| s |                                         |            |           |
| ( |                                         |            |           |
| N |                                         |            |           |
| o |                                         |            |           |
| t |                                         |            |           |
| e |                                         |            |           |
| 4 |                                         |            |           |
| ) |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Investments in Associated Organizations | 4,493,000  | 4,048,000 |
+---+-----------------------------------------+------------+-----------+
|   | Other                                   | 1,040,000  | 1,410,000 |
+---+-----------------------------------------+------------+-----------+
|   | Total Investments                       | 5,533,000  | 5,458,000 |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| C |                                         |            |           |
| u |                                         |            |           |
| r |                                         |            |           |
| r |                                         |            |           |
| e |                                         |            |           |
| n |                                         |            |           |
| t |                                         |            |           |
| A |                                         |            |           |
| s |                                         |            |           |
| s |                                         |            |           |
| e |                                         |            |           |
| t |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Cash and Cash Equivalents               | 359,000    | 359,000   |
+---+-----------------------------------------+------------+-----------+
|   | Short-Term Investments (Note 4)         | 8,000      | 8,000     |
+---+-----------------------------------------+------------+-----------+
|   | Accounts Receivable, less allowance for | 183,000    | 176,000   |
|   | doubtful                                |            |           |
+---+-----------------------------------------+------------+-----------+
|   | accounts of \$11,000 in 20X1 and        |            |           |
|   | \$10,000 in                             |            |           |
|   |                                         |            |           |
|   | 20X0                                    |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Materials and Supplies                  | 418,000    | 404,000   |
+---+-----------------------------------------+------------+-----------+
|   | Prepayments                             | 43,000     | 43,000    |
+---+-----------------------------------------+------------+-----------+
|   | Total Current Assets                    | 1,011,000  | 990,000   |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | 28,000     | 9,000     |
| * |                                         |            |           |
| D |                                         |            |           |
| e |                                         |            |           |
| f |                                         |            |           |
| e |                                         |            |           |
| r |                                         |            |           |
| r |                                         |            |           |
| e |                                         |            |           |
| d |                                         |            |           |
| C |                                         |            |           |
| h |                                         |            |           |
| a |                                         |            |           |
| r |                                         |            |           |
| g |                                         |            |           |
| e |                                         |            |           |
| s |                                         |            |           |
| ( |                                         |            |           |
| N |                                         |            |           |
| o |                                         |            |           |
| t |                                         |            |           |
| e |                                         |            |           |
| 5 |                                         |            |           |
| ) |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | \$         | \$4       |
| * |                                         | 41,406,000 | 0,283,000 |
| T |                                         |            |           |
| o |                                         |            |           |
| t |                                         |            |           |
| a |                                         |            |           |
| l |                                         |            |           |
| A |                                         |            |           |
| s |                                         |            |           |
| s |                                         |            |           |
| e |                                         |            |           |
| t |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+

The accompanying notes are an integral part of these statements.

+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| C |                                         |            |           |
| E |                                         |            |           |
| N |                                         |            |           |
| T |                                         |            |           |
| E |                                         |            |           |
| R |                                         |            |           |
| C |                                         |            |           |
| O |                                         |            |           |
| U |                                         |            |           |
| N |                                         |            |           |
| T |                                         |            |           |
| Y |                                         |            |           |
| E |                                         |            |           |
| L |                                         |            |           |
| E |                                         |            |           |
| C |                                         |            |           |
| T |                                         |            |           |
| R |                                         |            |           |
| I |                                         |            |           |
| C |                                         |            |           |
| E |                                         |            |           |
| N |                                         |            |           |
| E |                                         |            |           |
| R |                                         |            |           |
| G |                                         |            |           |
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| A |                                         |            |           |
| S |                                         |            |           |
| S |                                         |            |           |
| O |                                         |            |           |
| C |                                         |            |           |
| I |                                         |            |           |
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| I |                                         |            |           |
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| N |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
|   |                                         |            |           |
| * |                                         |            |           |
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|   |                                         |            |           |
| # |                                         |            |           |
|   |                                         |            |           |
| D |                                         |            |           |
| E |                                         |            |           |
| C |                                         |            |           |
| E |                                         |            |           |
| M |                                         |            |           |
| B |                                         |            |           |
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| R |                                         |            |           |
|   |                                         |            |           |
| 3 |                                         |            |           |
| 1 |                                         |            |           |
| , |                                         |            |           |
|   |                                         |            |           |
| 2 |                                         |            |           |
| 0 |                                         |            |           |
| X |                                         |            |           |
| 1 |                                         |            |           |
|   |                                         |            |           |
| a |                                         |            |           |
| n |                                         |            |           |
| d |                                         |            |           |
|   |                                         |            |           |
| 2 |                                         |            |           |
| 0 |                                         |            |           |
| X |                                         |            |           |
| 0 |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| E |                                         |            |           |
| Q |                                         |            |           |
| U |                                         |            |           |
| I |                                         |            |           |
| T |                                         |            |           |
| I |                                         |            |           |
| E |                                         |            |           |
| S |                                         |            |           |
| A |                                         |            |           |
| N |                                         |            |           |
| D |                                         |            |           |
| L |                                         |            |           |
| I |                                         |            |           |
| A |                                         |            |           |
| B |                                         |            |           |
| I |                                         |            |           |
| L |                                         |            |           |
| I |                                         |            |           |
| T |                                         |            |           |
| I |                                         |            |           |
| E |                                         |            |           |
| S |                                         |            |           |
| ( |                                         |            |           |
| N |                                         |            |           |
| o |                                         |            |           |
| t |                                         |            |           |
| e |                                         |            |           |
| 1 |                                         |            |           |
| ) |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         | 20X1       | 20X0      |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| E |                                         |            |           |
| q |                                         |            |           |
| u |                                         |            |           |
| i |                                         |            |           |
| t |                                         |            |           |
| i |                                         |            |           |
| e |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Memberships                             | \$ 60,000  | \$ 59,000 |
+---+-----------------------------------------+------------+-----------+
|   | Patronage Capital (Note 6)              | 16,683,000 | 1         |
|   |                                         |            | 5,343,000 |
+---+-----------------------------------------+------------+-----------+
|   | Other Equities (Note 7)                 | 268,000    | 180,000   |
+---+-----------------------------------------+------------+-----------+
|   | Net Unrealized Gain on Investments      | 15,000     | 8,000     |
|   | (Note 4)                                |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Total Equities                          | 17,026,000 | 1         |
|   |                                         |            | 5,590,000 |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| L |                                         |            |           |
| o |                                         |            |           |
| n |                                         |            |           |
| g |                                         |            |           |
| - |                                         |            |           |
| t |                                         |            |           |
| e |                                         |            |           |
| r |                                         |            |           |
| m |                                         |            |           |
| l |                                         |            |           |
| i |                                         |            |           |
| a |                                         |            |           |
| b |                                         |            |           |
| i |                                         |            |           |
| l |                                         |            |           |
| i |                                         |            |           |
| t |                                         |            |           |
| i |                                         |            |           |
| e |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | RUS Mortgage Notes, less current        | 16,956,000 | 1         |
|   | portion (Note 8)                        |            | 7,532,000 |
+---+-----------------------------------------+------------+-----------+
|   | CFC Mortgage Notes, less current        | 4,333,000  | 4,482,000 |
|   | portion (Note 8)                        |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Post-retirement benefit obligation      | 1,004,000  | 841,000   |
|   | (Note 9)                                |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Total Long-term liabilities             | 22,293,000 | 2         |
|   |                                         |            | 2,855,000 |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| C |                                         |            |           |
| u |                                         |            |           |
| r |                                         |            |           |
| r |                                         |            |           |
| e |                                         |            |           |
| n |                                         |            |           |
| t |                                         |            |           |
| L |                                         |            |           |
| i |                                         |            |           |
| a |                                         |            |           |
| b |                                         |            |           |
| i |                                         |            |           |
| l |                                         |            |           |
| i |                                         |            |           |
| t |                                         |            |           |
| i |                                         |            |           |
| e |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Line of credit note payable             | 425,000    | 300,000   |
+---+-----------------------------------------+------------+-----------+
|   | Current portion of long-term debt (Note | 725,000    | 700,000   |
|   | 8)                                      |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Accounts Payable - Purchased Power      | 245,000    | 203,000   |
+---+-----------------------------------------+------------+-----------+
|   | Accounts Payable -- Other               | 109,000    | 91,000    |
+---+-----------------------------------------+------------+-----------+
|   | Consumer Deposits                       | 408,000    | 413,000   |
+---+-----------------------------------------+------------+-----------+
|   | Other Current and Accrued Liabilities   | 116,000    | 78,000    |
+---+-----------------------------------------+------------+-----------+
|   | Total Current Liabilities               | 2,028,000  | 1,785,000 |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | 59,000     | 53,000    |
| * |                                         |            |           |
| D |                                         |            |           |
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| ) |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | \$         | \$4       |
| * |                                         | 41,406,000 | 0,283,000 |
| T |                                         |            |           |
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| * |                                         |            |           |
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+---+-----------------------------------------+------------+-----------+

The accompanying notes are an integral part of these statements.

+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
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+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         | 20X1       | 20X0      |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | \$         | \$1       |
| * |                                         | 12,899,000 | 2,042,000 |
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| a |                                         |            |           |
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| g |                                         |            |           |
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| v |                                         |            |           |
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| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| O |                                         |            |           |
| p |                                         |            |           |
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| r |                                         |            |           |
| a |                                         |            |           |
| t |                                         |            |           |
| i |                                         |            |           |
| n |                                         |            |           |
| g |                                         |            |           |
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| n |                                         |            |           |
| s |                                         |            |           |
| e |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Cost of Power /////////////////         | 4,408,000  | 4,095,000 |
+---+-----------------------------------------+------------+-----------+
|   | Distribution Operations                 | 833,000    | 913,000   |
+---+-----------------------------------------+------------+-----------+
|   | Distribution Maintenance                | 1,553,000  | 1,236,000 |
+---+-----------------------------------------+------------+-----------+
|   | Consumer Accounts                       | 575,000    | 547,000   |
+---+-----------------------------------------+------------+-----------+
|   | Consumer Service and Information        | 288,000    | 306,000   |
+---+-----------------------------------------+------------+-----------+
|   | Administrative and General              | 710,000    | 653,000   |
+---+-----------------------------------------+------------+-----------+
|   | Depreciation and Amortization           | 2,163,000  | 2,098,000 |
+---+-----------------------------------------+------------+-----------+
|   | Other                                   | 262,000    | 258,000   |
+---+-----------------------------------------+------------+-----------+
|   | Total Operating Expenses                | 10,792,000 | 1         |
|   |                                         |            | 0,106,000 |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | \$         | \$        |
| * |                                         | 2,107,000  | 1,936,000 |
| O |                                         |            |           |
| p |                                         |            |           |
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| r |                                         |            |           |
| a |                                         |            |           |
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| a |                                         |            |           |
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| i |                                         |            |           |
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| s |                                         |            |           |
| B |                                         |            |           |
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| f |                                         |            |           |
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| I |                                         |            |           |
| n |                                         |            |           |
| t |                                         |            |           |
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| s |                                         |            |           |
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| s |                                         |            |           |
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| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | 1,137,000  | 1,151,000 |
| * |                                         |            |           |
| I |                                         |            |           |
| n |                                         |            |           |
| t |                                         |            |           |
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| s |                                         |            |           |
| t |                                         |            |           |
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| x |                                         |            |           |
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| n |                                         |            |           |
| s |                                         |            |           |
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| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | \$ 970,000 | \$        |
| * |                                         |            | 785,000   |
| O |                                         |            |           |
| p |                                         |            |           |
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| A |                                         |            |           |
| f |                                         |            |           |
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| n |                                         |            |           |
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| e |                                         |            |           |
| s |                                         |            |           |
| t |                                         |            |           |
| E |                                         |            |           |
| x |                                         |            |           |
| p |                                         |            |           |
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| n |                                         |            |           |
| s |                                         |            |           |
| e |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| N |                                         |            |           |
| o |                                         |            |           |
| n |                                         |            |           |
| o |                                         |            |           |
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| e |                                         |            |           |
| r |                                         |            |           |
| a |                                         |            |           |
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| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Interest Income                         | 50,000     | 30,000    |
+---+-----------------------------------------+------------+-----------+
|   | Other Nonoperating Income               | 6,000      | 6,000     |
+---+-----------------------------------------+------------+-----------+
|   | Total Nonoperating Margins              | 56,000     | 36,000    |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | 361,000    | 283,000   |
| * |                                         |            |           |
| G |                                         |            |           |
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| s |                                         |            |           |
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| v |                                         |            |           |
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| C |                                         |            |           |
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| d |                                         |            |           |
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| t |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | \$         | \$        |
| * |                                         | 1,387,000  | 1,104,000 |
| N |                                         |            |           |
| e |                                         |            |           |
| t |                                         |            |           |
| M |                                         |            |           |
| a |                                         |            |           |
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| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | 15,343,000 | 1         |
| * |                                         |            | 4,345,000 |
| P |                                         |            |           |
| a |                                         |            |           |
| t |                                         |            |           |
| r |                                         |            |           |
| o |                                         |            |           |
| n |                                         |            |           |
| a |                                         |            |           |
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| a |                                         |            |           |
| t |                                         |            |           |
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| g |                                         |            |           |
| i |                                         |            |           |
| n |                                         |            |           |
| n |                                         |            |           |
| i |                                         |            |           |
| n |                                         |            |           |
| g |                                         |            |           |
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| a |                                         |            |           |
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| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | 47,000     | 106,000   |
| * |                                         |            |           |
| L |                                         |            |           |
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| s |                                         |            |           |
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| t |                                         |            |           |
| s |                                         |            |           |
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| f |                                         |            |           |
| C |                                         |            |           |
| a |                                         |            |           |
| p |                                         |            |           |
| i |                                         |            |           |
| t |                                         |            |           |
| a |                                         |            |           |
| l |                                         |            |           |
| C |                                         |            |           |
| r |                                         |            |           |
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| d |                                         |            |           |
| i |                                         |            |           |
| t |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | \$         | \$1       |
| * |                                         | 16,683,000 | 5,343,000 |
| P |                                         |            |           |
| a |                                         |            |           |
| t |                                         |            |           |
| r |                                         |            |           |
| o |                                         |            |           |
| n |                                         |            |           |
| a |                                         |            |           |
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| p |                                         |            |           |
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| d |                                         |            |           |
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| a |                                         |            |           |
| r |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+

The accompanying notes are an integral part of these statements.

+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| C |                                         |            |           |
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| * |                                         |            |           |
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| N |                                         |            |           |
| T |                                         |            |           |
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| * |                                         |            |           |
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|   |                                         |            |           |
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| * |                                         |            |           |
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| D |                                         |            |           |
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| E |                                         |            |           |
| M |                                         |            |           |
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| E |                                         |            |           |
| R |                                         |            |           |
| 3 |                                         |            |           |
| 1 |                                         |            |           |
| , |                                         |            |           |
| 2 |                                         |            |           |
| 0 |                                         |            |           |
| X |                                         |            |           |
| 1 |                                         |            |           |
| a |                                         |            |           |
| n |                                         |            |           |
| d |                                         |            |           |
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| 0 |                                         |            |           |
| X |                                         |            |           |
| 0 |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         | # 20X1     | # 20X0    |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | \          | \$        |
| * |                                         | $1,387,000 | 1,104,000 |
| N |                                         |            |           |
| e |                                         |            |           |
| t |                                         |            |           |
| M |                                         |            |           |
| a |                                         |            |           |
| r |                                         |            |           |
| g |                                         |            |           |
| i |                                         |            |           |
| n |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| O |                                         |            |           |
| t |                                         |            |           |
| h |                                         |            |           |
| e |                                         |            |           |
| r |                                         |            |           |
| C |                                         |            |           |
| o |                                         |            |           |
| m |                                         |            |           |
| p |                                         |            |           |
| r |                                         |            |           |
| e |                                         |            |           |
| h |                                         |            |           |
| e |                                         |            |           |
| n |                                         |            |           |
| s |                                         |            |           |
| i |                                         |            |           |
| v |                                         |            |           |
| e |                                         |            |           |
| I |                                         |            |           |
| n |                                         |            |           |
| c |                                         |            |           |
| o |                                         |            |           |
| m |                                         |            |           |
| e |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Unrealized holding gains (losses)       | 7,000      | 8,000     |
|   | arising during the year                 |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | \          | \$        |
| * |                                         | $1,394,000 | 1,112,000 |
| C |                                         |            |           |
| o |                                         |            |           |
| m |                                         |            |           |
| p |                                         |            |           |
| r |                                         |            |           |
| e |                                         |            |           |
| h |                                         |            |           |
| e |                                         |            |           |
| n |                                         |            |           |
| s |                                         |            |           |
| i |                                         |            |           |
| v |                                         |            |           |
| e |                                         |            |           |
| I |                                         |            |           |
| n |                                         |            |           |
| c |                                         |            |           |
| o |                                         |            |           |
| m |                                         |            |           |
| e |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+

The accompanying notes are an integral part of these statements.

+---+----------------------------------------+-------------+-----------+
| * |                                        |             |           |
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| N |                                        |             |           |
| * |                                        |             |           |
| * |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
| * |                                        |             |           |
| * |                                        |             |           |
| S |                                        |             |           |
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| W |                                        |             |           |
| S |                                        |             |           |
| * |                                        |             |           |
| * |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
| * |                                        |             |           |
| * |                                        |             |           |
| F |                                        |             |           |
| O |                                        |             |           |
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| T |                                        |             |           |
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| D |                                        |             |           |
| D |                                        |             |           |
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| 2 |                                        |             |           |
| 0 |                                        |             |           |
| X |                                        |             |           |
| 0 |                                        |             |           |
| * |                                        |             |           |
| * |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
|   |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
|   |                                        | ## 20X1     | # 20X0    |
+---+----------------------------------------+-------------+-----------+
|   |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
| * |                                        |             |           |
| * |                                        |             |           |
| C |                                        |             |           |
| A |                                        |             |           |
| S |                                        |             |           |
| H |                                        |             |           |
| F |                                        |             |           |
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| S |                                        |             |           |
| F |                                        |             |           |
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| R |                                        |             |           |
| A |                                        |             |           |
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| G |                                        |             |           |
| A |                                        |             |           |
| C |                                        |             |           |
| T |                                        |             |           |
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| V |                                        |             |           |
| I |                                        |             |           |
| T |                                        |             |           |
| I |                                        |             |           |
| E |                                        |             |           |
| S |                                        |             |           |
| * |                                        |             |           |
| * |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Cash Received from Consumers           | \           | \$1       |
|   |                                        | $12,882,000 | 2,017,000 |
+---+----------------------------------------+-------------+-----------+
|   | Cash Paid to Suppliers and Employees   | (8,335,000) | (7        |
|   |                                        |             | ,784,000) |
+---+----------------------------------------+-------------+-----------+
|   | Interest Received                      | 50,000      | 30,000    |
+---+----------------------------------------+-------------+-----------+
|   | Interest Paid                          | (1,137,000) | (1        |
|   |                                        |             | ,151,000) |
+---+----------------------------------------+-------------+-----------+
|   | Net Cash Provided by Operating         | 3,460,000   | 3,112,000 |
|   | Activities                             |             |           |
+---+----------------------------------------+-------------+-----------+
|   |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
| * |                                        |             |           |
| * |                                        |             |           |
| C |                                        |             |           |
| A |                                        |             |           |
| S |                                        |             |           |
| H |                                        |             |           |
| F |                                        |             |           |
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| N |                                        |             |           |
| G |                                        |             |           |
| A |                                        |             |           |
| C |                                        |             |           |
| T |                                        |             |           |
| I |                                        |             |           |
| V |                                        |             |           |
| I |                                        |             |           |
| T |                                        |             |           |
| I |                                        |             |           |
| E |                                        |             |           |
| S |                                        |             |           |
| * |                                        |             |           |
| * |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Construction and Acquisition of Plant  | (2,010,000) | (3        |
|   |                                        |             | ,285,000) |
+---+----------------------------------------+-------------+-----------+
|   | Plant Removal Costs                    | (1,378,000) | (270,000) |
+---+----------------------------------------+-------------+-----------+
|   | Materials Salvaged from Retirements    | 217,000     | 197,000   |
+---+----------------------------------------+-------------+-----------+
|   | (Increase) Decrease In:                |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Materials Inventory                    | (14,000)    | 10,000    |
+---+----------------------------------------+-------------+-----------+
|   | Deferred Charges-Preliminary Surveys   | (19,000)    | 24,000    |
|   | and Investigations                     |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Investments in Associated              | (76,000)    | (56,000)  |
|   | Organizations                          |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Other Investments                      | 370,000     | 323,000   |
+---+----------------------------------------+-------------+-----------+
|   | Inventory Adjustment-Deferred Credit   | (12,000)    | (5,000)   |
|   | Decrease                               |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Net Cash Used in Investing Activities  | (2,922,000) | (3        |
|   |                                        |             | ,062,000) |
+---+----------------------------------------+-------------+-----------+
|   |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
| * |                                        |             |           |
| * |                                        |             |           |
| C |                                        |             |           |
| A |                                        |             |           |
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| H |                                        |             |           |
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| F |                                        |             |           |
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| A |                                        |             |           |
| N |                                        |             |           |
| C |                                        |             |           |
| I |                                        |             |           |
| N |                                        |             |           |
| G |                                        |             |           |
| A |                                        |             |           |
| C |                                        |             |           |
| T |                                        |             |           |
| I |                                        |             |           |
| V |                                        |             |           |
| I |                                        |             |           |
| T |                                        |             |           |
| I |                                        |             |           |
| E |                                        |             |           |
| S |                                        |             |           |
| * |                                        |             |           |
| * |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Retirements of Patronage Capital       | (47,000)    | (106,000) |
|   | Credits                                |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Retired Capital Credits-Gain           | 6,000       | 6,000     |
+---+----------------------------------------+-------------+-----------+
|   | Donated Capital                        | 82,000      | 31,000    |
+---+----------------------------------------+-------------+-----------+
|   | RUS Loan Advances                      | \-          | 1,025,000 |
+---+----------------------------------------+-------------+-----------+
|   | Payments on RUS Debt                   | (540,000)   | (502,000) |
+---+----------------------------------------+-------------+-----------+
|   | Payments on CFC Debt                   | (160,000)   | (149,000) |
+---+----------------------------------------+-------------+-----------+
|   | Line of Credit                         | 125,000     | (225,000) |
+---+----------------------------------------+-------------+-----------+
|   | Increase/(Decrease) In:                |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Consumer Deposits                      | (5,000)     | (1,000)   |
+---+----------------------------------------+-------------+-----------+
|   | Memberships Issued                     | 1,000       | 1,000     |
+---+----------------------------------------+-------------+-----------+
|   | Net Cash Used in Financing Activities  | (538,000)   | 80,000    |
+---+----------------------------------------+-------------+-----------+
|   |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Net Increase/(Decrease) in Cash        | \$ 0        | \$130,000 |
+---+----------------------------------------+-------------+-----------+
|   | Cash - Beginning of Year               | 359,000     | 229,000   |
+---+----------------------------------------+-------------+-----------+
|   | Cash - End of Year                     | \$359,000   | \$359,000 |
+---+----------------------------------------+-------------+-----------+

The accompanying notes are an integral part of these statements.

+---+----------------------------------------+-------------+-----------+
|   |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
| * |                                        | ##          | #         |
| * |                                        |             |           |
| R |                                        | ## 20X1     | # 20X0    |
| E |                                        |             |           |
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| T |                                        |             |           |
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| A |                                        |             |           |
| S |                                        |             |           |
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| D |                                        |             |           |
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| A |                                        |             |           |
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| T |                                        |             |           |
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| T |                                        |             |           |
| I |                                        |             |           |
| E |                                        |             |           |
| S |                                        |             |           |
| * |                                        |             |           |
| * |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
| * |                                        | \$1,387,000 | \$        |
| * |                                        |             | 1,104,000 |
| N |                                        |             |           |
| e |                                        |             |           |
| t |                                        |             |           |
| M |                                        |             |           |
| a |                                        |             |           |
| r |                                        |             |           |
| g |                                        |             |           |
| i |                                        |             |           |
| n |                                        |             |           |
| s |                                        |             |           |
| * |                                        |             |           |
| * |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Adjustments to Reconcile Net Margins   |             |           |
|   | to Net Cash                            |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Provided by Operating Activities:      |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Depreciation and Amortization          | 2,163,000   | 2,098,000 |
+---+----------------------------------------+-------------+-----------+
|   | G&T and Other Capital Credits          | (362,000)   | (283,000) |
|   | (Non-Cash)                             |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Provision for Uncollectible Accounts   | 1,000       | (3,000)   |
|   | Receivable                             |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Accumulated Provision for Pensions and | 163,000     | 150,000   |
|   | Benefits                               |             |           |
+---+----------------------------------------+-------------+-----------+
|   | (Increase)/Decrease In:                |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Customer and Other Accounts Receivable | (8,000)     | 13,000    |
+---+----------------------------------------+-------------+-----------+
|   | Current and Accrued Assets -- Other    |             | 1,000     |
+---+----------------------------------------+-------------+-----------+
|   | Increase/(Decrease) In:                |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Accounts Payable                       | 60,000      | 26,000    |
+---+----------------------------------------+-------------+-----------+
|   | Deferred Energy Prepayments            | 18,000      | 11,000    |
+---+----------------------------------------+-------------+-----------+
|   | Current and Accrued Liabilities --     | 38,000      | (5,000)   |
|   | Other                                  |             |           |
+---+----------------------------------------+-------------+-----------+
|   | Total Adjustments                      | 2,073,000   | 2,008,000 |
+---+----------------------------------------+-------------+-----------+
| N |                                        | \$3,460,000 | \$        |
| e |                                        |             | 3,112,000 |
| t |                                        |             |           |
| C |                                        |             |           |
| a |                                        |             |           |
| s |                                        |             |           |
| h |                                        |             |           |
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| r |                                        |             |           |
| o |                                        |             |           |
| v |                                        |             |           |
| i |                                        |             |           |
| d |                                        |             |           |
| e |                                        |             |           |
| d |                                        |             |           |
| b |                                        |             |           |
| y |                                        |             |           |
| O |                                        |             |           |
| p |                                        |             |           |
| e |                                        |             |           |
| r |                                        |             |           |
| a |                                        |             |           |
| t |                                        |             |           |
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| n |                                        |             |           |
| g |                                        |             |           |
| A |                                        |             |           |
| c |                                        |             |           |
| t |                                        |             |           |
| i |                                        |             |           |
| v |                                        |             |           |
| i |                                        |             |           |
| t |                                        |             |           |
| i |                                        |             |           |
| e |                                        |             |           |
| s |                                        |             |           |
+---+----------------------------------------+-------------+-----------+
|   |                                        |             |           |
+---+----------------------------------------+-------------+-----------+

The accompanying notes are an integral part of these statements.

**CENTER COUNTY ELECTRIC ENERGY ASSOCIATION**

**NOTES TO FINANCIAL STATEMENTS**

**DECEMBER 31, 20X1 AND 20X0**

**1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

> \[*Include a brief description of the reporting entity's significant
> accounting policies in accordance with Accounting Principles Board
> Opinion No. 22, Disclosure of Accounting Policies.*
>
> *Disclosure of accounting policies should identify and describe the
> accounting principles followed by the borrower and the methods of
> applying those principles that materially affect the determination of
> financial position, cash flow, and results of operations.*
>
> *Disclosures of accounting policies do not have to be duplicated in
> this section if presented elsewhere as an integral part of the
> financial statements*.\]

2\. ASSETS PLEDGED:

> Substantially all assets are pledged as security for long-term debt to
> RUS and NRUCFC.

**3. ELECTRIC PLANT AND DEPRECIATION RATES AND PROCEDURES:**

> Listed below are the major classes of the electric plant as of
> December 31, 20X1 and 20X0:

+-----------------------------------------+--------------+--------------+
|                                         | # 20X1       | # 20X0       |
+-----------------------------------------+--------------+--------------+
| Intangible Plant                        | \$ 11,000    | \$ 11,000    |
+-----------------------------------------+--------------+--------------+
| Distribution Plant                      | 45,753,000   | 44,370,000   |
+-----------------------------------------+--------------+--------------+
| General Plant                           | 2,618,000    | 2,445,000    |
+-----------------------------------------+--------------+--------------+
| Electric Plant in Service               | \$48,382,000 | \$46,826,000 |
+-----------------------------------------+--------------+--------------+
| Construction Work in Progress           | 2,040,000    | 1,586,000    |
+-----------------------------------------+--------------+--------------+
| Total Utility Plant                     | \$50,422,000 | \$48,412,000 |
+-----------------------------------------+--------------+--------------+

> Provision has been made for depreciation of distribution plant at a
> straight-line composite rate of 3.00 percent per annum. General Plant
> depreciation rates have been applied on a straight-line basis as
> follows:
>
> Structures and Improvements 2.5%
>
> Office Furniture and Equipment 10.0%
>
> Transportation Equipment 14.0%
>
> Power Operated Equipment 12.0%
>
> Other General Plant 4.0%
>
> Communications Equipment 6.0%

4\. INVESTMENTS IN ASSOCIATED ORGANIZATIONS:

> Investments in associated organizations consisted of the following at
> December 20X1 and 20X0:

+-----------------------------------------+--------------+--------------+
|                                         | # 20X1       | # 20X0       |
+-----------------------------------------+--------------+--------------+
| National Rural Utilities Cooperative    |              |              |
| Finance Corporation:                    |              |              |
+-----------------------------------------+--------------+--------------+
| Membership Fee                          | \$ 1,000     | \$ 1,000     |
+-----------------------------------------+--------------+--------------+
| Capital Term Certificates               | 839,000      | 839,000      |
+-----------------------------------------+--------------+--------------+
| Patronage Capital                       | 288,000      | 276,000      |
+-----------------------------------------+--------------+--------------+
| Fall River Power Cooperative            | 3,019,000    | 2,898,000    |
+-----------------------------------------+--------------+--------------+
| Other                                   | 346,000      | 34,000       |
+-----------------------------------------+--------------+--------------+
|                                         | \$ 4,493,000 | \$ 4,048,000 |
+-----------------------------------------+--------------+--------------+

> Center County Electric Association has adopted SFAS No. 115,
> "Accounting for Certain Investments in Debt and Equity Securities." In
> accordance with SFAS No. 115, the Association has classified all the
> Other Investments as available-for-sale. Available-for-sale
> investments are stated at fair value with unrealized gains and losses
> included in members' equities. The cost of investments sold is based
> on the specific identification method.
>
> Long-term and short-term investments classified as available-for-sale
> were as follows at December 31, 20X1 and 20X0:

+-----------------------+-----------+-----------+-----------+-----------+
|                       | # 20X1    |           |           |           |
+-----------------------+-----------+-----------+-----------+-----------+
| Description           | A         | Gross\    | Gross\    | Fair\     |
|                       | mortized\ | U         | U         | Value     |
|                       | Cost      | nrealized | nrealized |           |
|                       |           | Gain      | Loss      |           |
+-----------------------+-----------+-----------+-----------+-----------+
| U.S. Treasury notes,  | \$        | \$14,000  | \$1,000   | \$        |
| bills and bonds       | 222,000   |           |           | 235,000   |
+-----------------------+-----------+-----------+-----------+-----------+
| Other U.S. Government | 380,000   | 6,000     | 4,000     | 382,000   |
| agency securities     |           |           |           |           |
+-----------------------+-----------+-----------+-----------+-----------+
| Other debt securities | 431,000   | 3,000     | 3,000     | 431,000   |
+-----------------------+-----------+-----------+-----------+-----------+
|                       | \$        | \$23,000  | \$8,000   | \$        |
|                       | 1,033,000 |           |           | 1,048,000 |
+-----------------------+-----------+-----------+-----------+-----------+

+-----------------------+-----------+-----------+-----------+-----------+
|                       | # 20X0    |           |           |           |
+-----------------------+-----------+-----------+-----------+-----------+
| [\                    | A         | Gross\    | Gross\    | Fair\     |
| Des                   | mortized\ | U         | U         | Value     |
| cription]{.underline} | Cost      | nrealized | nrealized |           |
|                       |           | Gain      | Loss      |           |
+-----------------------+-----------+-----------+-----------+-----------+
| U.S. Treasury notes,  | \$        | \$5,000   | \$1,000   | \$        |
| bills and bonds       | 397,000   |           |           | 401,000   |
+-----------------------+-----------+-----------+-----------+-----------+
| Other U.S. Government | 410,000   | 2,000     |           | 412,000   |
| agency securities     |           |           |           |           |
+-----------------------+-----------+-----------+-----------+-----------+
| Other debt securities | 604,000   | 1,000     |           | 605,000   |
+-----------------------+-----------+-----------+-----------+-----------+
|                       | \$        | \$8,000   | \$1,000   | \$        |
|                       | 1,411,000 |           |           | 1,418,000 |
+-----------------------+-----------+-----------+-----------+-----------+

> At December 31, 20X1, maturities of investments classified as
> available-for-sale were as follows:

+-------------------------------------------+-------------+------------+
|                                           | # Amo       | #          |
|                                           | rtized Cost | Fair Value |
+-------------------------------------------+-------------+------------+
| Less than One Year                        | \$ 8,000    | \$ 8,000   |
+-------------------------------------------+-------------+------------+
| One through Five Years                    | 958,000     | 961,000    |
+-------------------------------------------+-------------+------------+
| After Five Years                          | 67,000      | 79,000     |
+-------------------------------------------+-------------+------------+
| Total                                     | \$1,033,000 | \          |
|                                           |             | $1,048,000 |
+-------------------------------------------+-------------+------------+

5\. DEFERRED CHARGES:

> Following is a summary of amounts recorded as deferred charges as of
> December 31, 20X1 and 20X0:

+-------------------------------------------+-------------+------------+
|                                           | # 20X1      | # 20X0     |
+-------------------------------------------+-------------+------------+
| Preliminary Surveys and Investigations    | \$28,000    | \$ 9,000   |
+-------------------------------------------+-------------+------------+

**6. PATRONAGE CAPITAL**

> At December 31, 20X1 and 20X0, patronage capital consisted of:

  ------------------------------------------- -------------- --------------
                                              20X1           20X0

  Assignable                                  \$ 1,387,000   \$ 1,104,000

  Assigned to date                            15,955,000     14,851,000

                                              \$17,342,000   \$15,955,000

  Less: Retirements to Date                   659,000        612,000

                                              \$16,683,000   \$15,343,000
  ------------------------------------------- -------------- --------------

> Under the provisions of the Mortgage Agreement, until the equities and
> margins equal or exceed thirty percent of the total assets of the
> cooperative, the return to patrons of contributed capital is generally
> limited to twenty-five percent of the patronage capital or margins
> received by the cooperative in the prior calendar year. The equities
> and margins of the cooperative represent 41 percent of the total
> assets at balance sheet date. Capital credit retirements in the amount
> of \$47,000 were paid in 20X1.

**7. OTHER EQUITIES:**

> At December 31, 20X1 and 20X0, other equities consisted of:

  ------------------------------------------- -------------- -------------
                                              20X1           20X0

  Retired Capital Credits-Gain                \$ 181,000     \$ 175,000

  Donated Capital                             87,000         5,000

                                              \$ 268,000     \$ 180,000
  ------------------------------------------- -------------- -------------

8\. MORTGAGE NOTES:

> Long-term debt is primarily represented by mortgage notes payable to
> the United States of America and to the National Rural Utilities
> Cooperative Finance Corporation. Following is a summary of outstanding
> long-term debt as of December 31, 20X1 and 20X0:

  ------------------------------------------- -------------- --------------
                                              20X1           20X0

  RUS, 2% Notes due March 31, 2007            \$ 544,000     \$ 562,000

  RUS, 5% Notes due December 31, 2033         16,971,000     17,510,000

                                              \$17,515,000   \$18,072,000

  Less: Current Maturities                    559,000        540,000

                                              \$16,956,000   \$17,532,000

                                                             

                                              20X1           20X0

  CFC, 5.75% Notes due March 31, 2013         \$ 166,000     \$ 171,000

  CFC, 6.95% Notes due July 31, 2018          1,453,000      1,499,000

  CFC, 7.00% Notes due September 30, 2009     443,000        457,000

  CFC, 6.40% Notes due October 31, 2026       2,437,000      2,515,000

                                              \$4,499,000    \$4,642,000

  Less: Current Maturities                    166,000        160,000

                                              \$4,333,000    \$4,482,000
  ------------------------------------------- -------------- --------------

> Unadvanced loan funds of \$286,000 and \$2,500,000 are available to
> the cooperative on loan commitments from RUS and CFC as of December
> 31, 20X1. As of December 31, 20X1, annual maturities of long-term debt
> outstanding for the next five years are as follows:

+-------------------------------------+----------+----------+----------+
|                                     | # RUS    | # CFC    | # TOTAL  |
+-------------------------------------+----------+----------+----------+
| 20X2                                | \        | \        | # \      |
|                                     | $559,000 | $166,000 | $725,000 |
+-------------------------------------+----------+----------+----------+
| 20X3                                | 563,000  | 167,000  | 730,000  |
+-------------------------------------+----------+----------+----------+
| 20X4                                | 565,000  | 167,000  | 732,000  |
+-------------------------------------+----------+----------+----------+
| 20X5                                | 568,000  | 168,000  | 736,000  |
+-------------------------------------+----------+----------+----------+
| 20X6                                | 570,000  | 169,000  | 739,000  |
+-------------------------------------+----------+----------+----------+

**9. EMPLOYEE BENEFITS:**

> Substantially all of the employees of the Association are covered by
> the ABC Retirement and Security Program, a defined benefit pension
> plan.
>
> In addition to pension contributions the Association provides health
> care benefits for substantially all retired employees and dependents
> until they reach age 65.
>
> The following illustrates the pension and postretirement benefits
> plans for the year ended December 31, 20X1 and 20X0.

<table>
<colgroup>
<col style="width: 30%" />
<col style="width: 7%" />
<col style="width: 9%" />
<col style="width: 5%" />
<col style="width: 11%" />
<col style="width: 3%" />
<col style="width: 13%" />
<col style="width: 2%" />
<col style="width: 14%" />
<col style="width: 0%" />
</colgroup>
<tbody>
<tr class="odd">
<td></td>
<td colspan="4">Pension Benefits</td>
<td colspan="4">Other Benefits</td>
<td></td>
</tr>
<tr class="even">
<td></td>
<td colspan="2">20X1</td>
<td colspan="2">20X0</td>
<td colspan="2">20X1</td>
<td colspan="2">20X0</td>
<td></td>
</tr>
<tr class="odd">
<td><blockquote>
<p>Benefit obligation at December 31</p>
</blockquote></td>
<td colspan="2">$1,762,000</td>
<td colspan="2">$2,080,000</td>
<td colspan="2">$1,899,000</td>
<td colspan="2">$1,800,000</td>
<td></td>
</tr>
<tr class="even">
<td><blockquote>
<p>Fair value of plan assets at December 31</p>
</blockquote></td>
<td colspan="2">715,000</td>
<td colspan="2">513,000</td>
<td colspan="2">0</td>
<td colspan="2">0</td>
<td></td>
</tr>
<tr class="odd">
<td><blockquote>
<p>Funded status</p>
</blockquote></td>
<td colspan="2">$(1,047,000)</td>
<td colspan="2">$(1,567,000)</td>
<td colspan="2">$(1,899,000)</td>
<td colspan="2">$(1,800,000)</td>
<td></td>
</tr>
<tr class="even">
<td><blockquote>
<p>Prepaid (Accrued) benefit cost</p>
</blockquote></td>
<td colspan="2">$(243,000)</td>
<td colspan="2">$(365,000)</td>
<td colspan="2">$(1,004,000)</td>
<td colspan="2">$(841,000)</td>
<td></td>
</tr>
<tr class="odd">
<td><blockquote>
<p>Weighted-average assumptions as of December 31</p>
</blockquote></td>
<td colspan="2"></td>
<td colspan="2"></td>
<td colspan="3"></td>
<td colspan="2"></td>
</tr>
<tr class="even">
<td><blockquote>
<p>Discount rate</p>
</blockquote></td>
<td colspan="2">6.75%</td>
<td colspan="2">5.50%</td>
<td colspan="3">8.00%</td>
<td colspan="2">8.00%</td>
</tr>
<tr class="odd">
<td><blockquote>
<p>Expected return on plan assets</p>
</blockquote></td>
<td colspan="2">6.50%</td>
<td colspan="2">6.00%</td>
<td colspan="3"></td>
<td colspan="2"></td>
</tr>
<tr class="even">
<td><blockquote>
<p>Rate of compensation increase</p>
</blockquote></td>
<td colspan="2">5.00%</td>
<td colspan="2">5.50%</td>
<td colspan="3">6.00%</td>
<td colspan="2">6.00%</td>
</tr>
<tr class="odd">
<td colspan="10"><blockquote>
<p>For measurement purposes, a 10 percent annual rate of increase in the
per capita cost of covered health benefits was assumed for 20X2. The
rate was assumed to decrease gradually to 5 percent and remain at that
level thereafter</p>
</blockquote></td>
</tr>
<tr class="even">
<td colspan="2"></td>
<td colspan="4">Pension Benefits</td>
<td colspan="4">Other Benefits</td>
</tr>
<tr class="odd">
<td colspan="2"></td>
<td colspan="2">20X1</td>
<td colspan="2">20X0</td>
<td colspan="2">20X1</td>
<td colspan="2">20X0</td>
</tr>
<tr class="even">
<td colspan="2"><blockquote>
<p>Benefit cost</p>
</blockquote></td>
<td colspan="2">$253,000</td>
<td colspan="2">$232,000</td>
<td colspan="2">$220,000</td>
<td colspan="2">$220,000</td>
</tr>
<tr class="odd">
<td colspan="2"><blockquote>
<p>Employer Contribution</p>
</blockquote></td>
<td colspan="2">160,000</td>
<td colspan="2">225,000</td>
<td colspan="2">57,000</td>
<td colspan="2">55,000</td>
</tr>
<tr class="even">
<td colspan="2"><blockquote>
<p>Benefits Paid</p>
</blockquote></td>
<td colspan="2">(7,000)</td>
<td colspan="2">(48,000)</td>
<td colspan="2">(57,000)</td>
<td colspan="2">(55,000)</td>
</tr>
</tbody>
</table>

**10. DEFERRED CREDITS:**

> Following is a summary of the amounts recorded as deferred credits as
> of December 31, 20X1 and 20X0:

+------------------------------------------------+----------+---------+
|                                                | # 20X1   | # 20X0  |
+------------------------------------------------+----------+---------+
| Customer Energy Prepayments                    | \$       | \$      |
|                                                | 33,000   | 15,000  |
+------------------------------------------------+----------+---------+
| Inventory Adjustment                           | 26,000   | 38,000  |
+------------------------------------------------+----------+---------+
|                                                | \$       | \$      |
|                                                | 59,000   | 53,000  |
+------------------------------------------------+----------+---------+

**11. LITIGATION:**

> The association is a defendant in an action in which the plaintiff
> claims damages totaling \$200,000 for personal injuries sustained. The
> action has been dismissed by the District Court, but is on appeal
> before the State Supreme Court. Management is of the opinion that no
> liability will be incurred by the association as a result of this
> action.

**12. COMMITMENTS:**

> Under its wholesale power agreement, the association is committed to
> purchase its electric power and energy requirements from Fall River
> Power Cooperative, Inc., until December 31, 20X7. The rates paid for
> such purchases are subject to review annually.

##### EXHIBIT 5 -- ILLUSTRATIVE INDEPENDENT AUDITOR'S 

**MANAGEMENT LETTER FOR ELECTRIC BORROWERS**

RUS requires that CPAs auditing RUS borrowers provide a management
letter in accordance with § 1773.33. This letter must be signed by the
CPA, bear the same date as the auditor's report, and be addressed to the
borrower's board of directors.

Illustrative Independent Auditors\' Management Letter for
Electric Borrowers

March 2, 20X2

Board of Directors

Center County Electric Energy Association, Inc.

\[City, State\]

We have audited the financial statements of Center County Electric
Energy Association, Inc. for the year ended December 31, 20X1, and have
issued our report thereon dated March 2, 20X2. We conducted our audit in
accordance with generally accepted auditing standards, the standards
applicable to financial audits contained in *Government Auditing
Standards* issued by the Comptroller General of the United States, and 7
CFR part 1773, Policy on Audits of Rural Utilities Service (RUS)
Borrowers. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement.

In planning and performing our audit of the financial statements of
Center County Electric Energy Association, Inc. for the year ended
December 31, 20X1, we considered its internal control over financial
reporting in order to determine our auditing procedures for the purpose
of expressing an opinion on the financial statements and not to provide
assurance on the internal control over financial reporting.

Our consideration of the internal control over financial reporting would
not necessarily disclose all matters in the internal control over
financial reporting that might be material weaknesses. A material
weakness is a condition in which the design or operation of one or more
of the internal control components does not reduce to a relatively low
level the risk that misstatements in amounts that would be material in
relation to the financial statements being audited may occur and not be
detected within a timely period by employees in the normal course of
performing their assigned functions. We noted no matters involving the
internal control over financial reporting that we consider to be
material weaknesses. \[*If a material weakness was noted, refer the
reader to the independent auditors\' report on compliance and on
internal control over financial reporting*.\]

Section 1773.33 requires comments on specific aspects of the internal
control over financial reporting, compliance with specific RUS loan and
security instrument provisions, and other additional matters. We have
grouped our comments accordingly. In addition to obtaining reasonable
assurance about whether the financial statements are free from material
misstatements, at your request, we performed tests of specific aspects
of the internal control over financial reporting, of compliance with
specific RUS loan and security instrument provisions, and of additional
matters. The specific aspects of the internal control over financial
reporting, compliance with specific RUS loan and security instrument
provisions, and additional matters tested include, among other things,
the accounting procedures and records, materials control, compliance
with specific RUS loan and security instrument provisions set forth in 7
CFR 1773.33 (e)(1), related party transactions, depreciation rates, a
schedule of deferred debits and credits, and a schedule of investments,
upon which we express an opinion. In addition, our audit of the
financial statements also included the procedures specified in 7 CFR
1773.38 - .45. Our objective was not to provide an opinion on these
specific aspects of the internal control over financial reporting,
compliance with specific RUS loan and security instrument provisions, or
additional matters, and accordingly, we express no opinion thereon.

No reports other than our independent auditors\' report, and our
independent auditor's report on compliance and on internal control over
financial reporting, all dated March 2, 20X2 or summary of
recommendations related to our audit have been furnished to management.

Our comments on specific aspects of the internal control over financial
reporting, compliance with specific RUS loan and security instrument
provisions, and other additional matters as required by 7 CFR 1773.33
are presented below.

COMMENTS ON CERTAIN SPECIFIC ASPECTS OF THE INTERNAL CONTROL OVER
FINANCIAL REPORTING

We noted no matters regarding Center County Electric Energy Association,
Inc.\'s internal control over financial reporting and its operation that
we consider to be a material weakness as previously defined with respect
to:

-   The accounting procedures and records \[*list other comments*\];

-   The process for accumulating and recording labor, material, and
    overhead costs, and the distribution of these costs to construction,
    retirement, and maintenance or other expense accounts \[*list other
    comments*\]; and

-   The materials control \[*list other comments*\].

COMMENTS ON COMPLIANCE WITH SPECIFIC RUS LOAN AND SECURITY INSTRUMENT
PROVISIONS

At your request, we have performed the procedures enumerated below with
respect to compliance with certain provisions of laws, regulations,
contracts, and grants. The procedures we performed are summarized as
follows:

\- Procedures performed with respect to the requirement for a borrower
to obtain written approval of the mortgagee to enter into any contract
for the operation or maintenance of property, or for the use of
mortgaged property by others for the year ended December 31, 20X1:

1\. Obtained and read a borrower-prepared schedule of new written
contracts entered into during the year for the operation or maintenance
of its property, or for the use of its property by others as defined in
§1773.33 (e)(1)(i).

2\. Reviewed Board of Director minutes to ascertain whether
board-approved written contracts are included in the borrower-prepared
schedule.

3\. Noted the existence of written RUS \[*and other mortgagee*\]
approval of each contract listed by the borrower.

\- Procedure performed with respect to the requirement to submit RUS
Form 7 or Form 12 to the RUS:

1\. Agreed amounts reported in Form 7 or Form 12 to Center County
Electric Energy Association, Inc.\'s records.

The results of our tests indicate that, with respect to the items
tested, Center County Electric Energy Association, Inc. complied, except
as noted below, in all material respects, with the specific RUS loan and
security instrument provisions referred to below. The specific
provisions tested, as well as any exceptions noted, include the
requirements that:

\- The borrower has obtained written approval of the RUS \[*and other
mortgagees*\] to enter into any contract for the operation or
maintenance of property, or for the use of mortgaged property by others
as defined in §1773.33 (e)(1)(i) \[*list all exceptions*\]; and

\- The borrower has submitted its Form 7 or Form 12 to the RUS and the
Form 7 or Form 12, Financial and Statistical Report, as of December 31,
20X1, represented by the borrower as having been submitted to RUS is in
agreement with the Center County Electric Energy Association, Inc.\'s
audited records in all material respects \[*list all exceptions*\] \[*or
if the audit year end is other than December 31*\], appears reasonable
based upon the audit procedures performed \[*list all exceptions*\].

COMMENTS ON OTHER ADDITIONAL MATTERS

In connection with our audit of the financial statements of Center
County Electric Energy Association, Inc., nothing came to our attention
that caused us to believe that Center County Electric Energy
Association, Inc. failed to comply with respect to:

\- The reconciliation of continuing property records to the controlling
general ledger plant accounts addressed at 7 CFR 1773.33 (c)(1) \[*list
all exceptions*\];

\- The clearing of the construction accounts and the accrual of
depreciation on completed construction addressed at 7 CFR 1773.33 (c)(2)
\[*list all exceptions*\];

\- The retirement of plant addressed at 7 CFR 1773.33 (c)(3) and (4)
\[*list all exceptions*\];

\- Approval of the sale, lease or transfer of capital assets and
disposition of proceeds for the sale or lease of plant, material, or
scrap addressed at 7 CFR 1773.33 (c)(5) \[*list all exceptions*\];

\- The disclosure of material related party transactions, in accordance
with Statement of Financial Accounting Standards No. 57, Related Party
Transactions, for the year ended December 31, 20X1, in the financial
statements referenced in the first paragraph of this report addressed at
7 CFR 1773.33 (f) \[*list all exceptions*\];

\- The depreciation rates addressed at 7 CFR 1773.33 (g) \[*list all
exceptions*\];

\- The detailed schedule of deferred debits and deferred credits; and

\- The detailed schedule of investments.

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The detailed schedule of deferred
debits and deferred credits required by 7 CFR 1773.33 (h), and the
detailed schedule of investments required by 7 CFR 1773.33 (i), and
provided below, are presented for purposes of additional analysis and
are not a required part of the basic financial statements. This
information has been subjected to the auditing procedures applied in our
audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial
statements taken as a whole.

\[*The detailed schedule of deferred debits and deferred credits would
be included here. The total amount of deferred debits and deferred
credits as reported in the schedule must agree with the totals reported
on the Balance Sheet under the specific captions of \"Deferred Debits\"
and \"Deferred Credits\". Those items that have been approved, in
writing, by RUS should be clearly indicated*.\]

\[*The detailed schedule of investments would be included here. The
total amount of the investment in each company reported in this schedule
must agree with the detail investment subsidiary account(s)*.\]

This report is intended solely for the information and use of the board
of directors, 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

# APPENDIX B

**Sample Reports for a Class A or B**

**Commercial Telecommunications Company**

Appendix B includes an example of a short-form auditor\'s report, report
on compliance and on internal controls over financial reporting,
financial statements and accompanying notes, and management letter for a
commercial telecommunications company. The sample auditor\'s report is
intended as a guide only and, while it is recommended that the format be
followed, each auditor\'s report should be prepared to adequately cover
the circumstances. To the extent possible, it should be used as a guide
in preparing auditors\' reports for other types of telecommunications
borrowers.

##### Exhibit 1 - Sample Auditor\'s Report

Certified Public Accountants

1600 Main Street

City, State 24105

The Board of Directors

Center County Telecommunications Systems Inc.

*Independent Auditor\'s Report*

We have audited the accompanying balance sheets of Center County
Telecommunications Systems Inc. as of December 31, 20X1 and 20X0, and
the related statements of revenue and patronage capital, and cash flows
for the years then ended. These financial statements are the
responsibility of Center County Telecommunications Systems, Inc.'s
management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audits in accordance with generally accepted auditing
standards 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 of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Center
County Telecommunications Systems Inc. as of December 31, 20X1 and 20X0,
and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.

In accordance with *Government Auditing Standards*, we have also issued
our report dated March 2, 20X2, on our consideration of Center County
Telecommunications Systems, Inc.'s internal control over financial
reporting and our tests of its compliance with certain provisions of
laws, regulations, contracts and grants. That report is an integral part
of an audit performed in accordance with *Government Auditing Standards*
and should be read in conjunction with this report in considering the
results of our audit.

Certified Public Accountants

March 2, 20X2

##### Exhibit 2

##### Sample Report on Compliance and on Internal Control over Financial 

##### Reporting, the CPA found No Reportable Instances of Noncompliance and No Material Weaknesses (No Reportable Conditions Identified)

Certified Public Accountants

1600 Main Street

City, State 24105

The Board of Directors

Center County Telecommunications Systems, Inc.

We have audited the financial statements of Center County
Telecommunications Systems, Inc. as of and for the years ended December
31, 20X1 and 20X0, and have issued our report thereon dated March 2,
20X2. We conducted our audits in accordance with generally accepted
auditing standards and the standards applicable to financial audits
contained in *Government Auditing Standards*, issued by the Comptroller
General of the United States.

# Compliance

As part of obtaining reasonable assurance about whether Center County
Telecommunications Systems, Inc.'s financial statements are free of
material misstatement, we performed tests of its compliance with certain
provisions of laws, regulations, contracts, and grants, 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 that are required to be reported
under *Government Auditing Standards.* \[*If the CPA has issued a
separate letter to the management detailing immaterial instances of
noncompliance, modify this paragraph to include a statement such as the
following: However, we noted certain immaterial instances of
noncompliance which we have reported to the management of Center County
Telecommunications Systems, Inc. in a separate letter dated March 2,
20X2*.\]

# Internal Control Over Financial Reporting

In planning and performing our audit we considered Center County
Telecommunications Systems, Inc.\'s internal control over financial
reporting in order to determine our auditing procedures for the purpose
of expressing our opinion on the financial statements and not to provide
assurance on the internal control over financial reporting. Our
consideration of the internal control over financial reporting would not
necessarily disclose all matters in the internal control over financial
reporting that might be material weaknesses. A material weakness is a
condition in which the design or operation of one or more of the
internal control components does not reduce to a relatively low level
the risk that misstatements in amounts that would be material in
relation to the financial statements being audited may occur and not be
detected within

a timely period by employees in the normal course of performing their
assigned functions. We noted no matters involving the internal control
over financial reporting and its operation that we consider to be
material weaknesses. \[*If the CPA has issued a separate letter to
management to communicate other matters involving the design and
operation of the internal control over financial reporting, modify this
paragraph to include a statement such as the following: However, we
noted other matters involving the internal control over financial
reporting which we have reported to the management of \[Name of
Company\] in a separate letter dated March 2, 20X2.*\]

This report is intended solely for the information and use of the audit
committee, management, the Rural Utilities Service, 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

March 2, 20X2

##### Exhibit 3

**Sample Report on Compliance and on Internal Control over Financial**

**Reporting, the CPA Found Reportable Instances of Noncompliance and
Reportable Conditions were identified**

Certified Public Accountants

1600 Main Street

City, State 24105

The Board of Directors

Center County Telecommunications Systems, Inc.:

We have audited the financial statements of Center County
Telecommunications Systems, Inc. as of and for the years ended December
31, 20X1 and 20X0, and have issued our report thereon dated March 2,
20X2. We conducted our audit in accordance with generally accepted
auditing standards and the standards applicable to financial audits
contained in *Government Auditing Standards*, issued by the Comptroller
General of the United States.

# Compliance

As part of obtaining reasonable assurance about whether Center County
Telecommunications Systems, Inc.\'s financial statements are free of
material misstatement, we performed tests of its compliance with certain
provisions of laws, regulations, contracts, and grants, 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 instances of noncompliance that are required to be reported
under *Government Auditing Standards*. \[*A description of the findings
should be included in the report*.\]\[*If the CPA has issued a separate
letter to the management detailing immaterial instances of
noncompliance, modify this paragraph to include a statement such as the
following: We also noted certain immaterial instances of noncompliance
which we have reported to the management of Center County
Telecommunications Systems, Inc. in a separate letter dated March 2,
20X2*.\]

# Internal Control Over Financial Reporting

In planning and performing our audit, we considered Center County
Telecommunications Systems, Inc.\'s internal control over financial
reporting in order to determine our auditing procedures for the purpose
of expressing our opinion on the financial statements and not to provide
assurance on the internal control over financial reporting. However, we
noted certain matters involving the internal control over financial
reporting and its operation that we consider to be reportable
conditions. Reportable conditions involve matters coming to our
attention relating to significant deficiencies in the design or
operation of the internal control over financial reporting that, in our
judgment, could adversely affect Center County Telecommunications

Systems, Inc.\'s ability to record, process, summarize, and report
financial data consistent with the assertions of management in the
financial statements. \[*A description of the reportable conditions
should be included in the report*.\]

A material weakness is a condition in which the design or operation of
one or more of the internal control components does not reduce to a
relatively low level the risk that misstatements in amounts that would
be material in relation to the financial statements being audited may
occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. Our consideration
of the internal control over financial reporting would not necessarily
disclose all matters in the internal control that might be reportable
conditions and, accordingly, would not necessarily disclose all
reportable conditions that are also considered to be material
weaknesses. However, we believe none of the reportable conditions
described above is a material weakness. \[*If conditions believed to be
material weaknesses are disclosed, the last sentence should be deleted
and instead the report should identify which of the reportable
conditions described above are considered to be material weaknesses*.\]
\[*If the CPA has issued a separate letter to management to communicate
other matters involving the design and operation of the internal control
over financial reporting, modify this paragraph to include a statement
such as the following: We also noted other matters involving the
internal control over financial reporting which we have reported to the
management of Center County Telecommunications Systems, Inc. in a
separate letter dated March 2, 20X2*.\]

This report is intended solely for the information and use of the audit
committee, management, the Rural Utilities Service, 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

March 2, 20X2

##### EXHIBIT 4 - SAMPLE FINANCIAL STATEMENTS

+---+----------------------------------------+------------+------------+
| * |                                        |            |            |
| * |                                        |            |            |
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| M |                                        |            |            |
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| N |                                        |            |            |
| I |                                        |            |            |
| C |                                        |            |            |
| A |                                        |            |            |
| T |                                        |            |            |
| I |                                        |            |            |
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| N |                                        |            |            |
| S |                                        |            |            |
| S |                                        |            |            |
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| S |                                        |            |            |
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| N |                                        |            |            |
| C |                                        |            |            |
| E |                                        |            |            |
| S |                                        |            |            |
| H |                                        |            |            |
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| * |                                        |            |            |
| D |                                        |            |            |
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| C |                                        |            |            |
| E |                                        |            |            |
| M |                                        |            |            |
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| R |                                        |            |            |
| 3 |                                        |            |            |
| 1 |                                        |            |            |
| , |                                        |            |            |
| 2 |                                        |            |            |
| 0 |                                        |            |            |
| X |                                        |            |            |
| 1 |                                        |            |            |
| a |                                        |            |            |
| n |                                        |            |            |
| d |                                        |            |            |
| 2 |                                        |            |            |
| 0 |                                        |            |            |
| X |                                        |            |            |
| 0 |                                        |            |            |
| * |                                        |            |            |
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|   |                                        |            |            |
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| * |                                        |            |            |
| A |                                        |            |            |
| S |                                        |            |            |
| S |                                        |            |            |
| E |                                        |            |            |
| T |                                        |            |            |
| S |                                        |            |            |
| ( |                                        |            |            |
| N |                                        |            |            |
| o |                                        |            |            |
| t |                                        |            |            |
| e |                                        |            |            |
| s |                                        |            |            |
| 1 |                                        |            |            |
| a |                                        |            |            |
| n |                                        |            |            |
| d |                                        |            |            |
| 2 |                                        |            |            |
| ) |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        | 20X1       | 20X0       |
+---+----------------------------------------+------------+------------+
| * |                                        |            |            |
| * |                                        |            |            |
| C |                                        |            |            |
| u |                                        |            |            |
| r |                                        |            |            |
| r |                                        |            |            |
| e |                                        |            |            |
| n |                                        |            |            |
| t |                                        |            |            |
| A |                                        |            |            |
| s |                                        |            |            |
| s |                                        |            |            |
| e |                                        |            |            |
| t |                                        |            |            |
| s |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   | Cash - Construction Funds              | \$ 500     | \$ 300     |
+---+----------------------------------------+------------+------------+
|   | Cash - General Funds                   | 60,000     | 32,000     |
+---+----------------------------------------+------------+------------+
|   | Temporary Investments                  | 26,000     | 24,000     |
+---+----------------------------------------+------------+------------+
|   | Accounts Receivable, less accumulated  |            |            |
|   | provision                              |            |            |
+---+----------------------------------------+------------+------------+
|   | of \$35,000 in 20X1 and \$34,000 in    | 740,000    | 667,000    |
|   | 20X0.                                  |            |            |
+---+----------------------------------------+------------+------------+
|   | Materials and Supplies                 | 250,000    | 210,000    |
+---+----------------------------------------+------------+------------+
|   | Prepayments (Note 3)                   | 50,000     | 31,700     |
+---+----------------------------------------+------------+------------+
|   | Other Current Assets                   | 25,000     | 30,000     |
+---+----------------------------------------+------------+------------+
|   | Total Current Assets                   | \          | \$ 995,000 |
|   |                                        | $1,151,500 |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| # |                                        |            |            |
| # |                                        |            |            |
|   |                                        |            |            |
| N |                                        |            |            |
| o |                                        |            |            |
| n |                                        |            |            |
| c |                                        |            |            |
| u |                                        |            |            |
| r |                                        |            |            |
| r |                                        |            |            |
| e |                                        |            |            |
| n |                                        |            |            |
| t |                                        |            |            |
|   |                                        |            |            |
| A |                                        |            |            |
| s |                                        |            |            |
| s |                                        |            |            |
| e |                                        |            |            |
| t |                                        |            |            |
| s |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   | Investments (Note 4)                   |            |            |
+---+----------------------------------------+------------+------------+
|   | Marketable Securities                  | 741,500    | 705,000    |
+---+----------------------------------------+------------+------------+
|   | Nonregulated                           | 1,550,000  | 1,450,000  |
+---+----------------------------------------+------------+------------+
|   | Other deferred charges                 | 39,000     | 12,000     |
+---+----------------------------------------+------------+------------+
|   | Total Noncurrent Assets                | 2,330,500  | 2,167,000  |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        |            |            |
| * |                                        |            |            |
| P |                                        |            |            |
| r |                                        |            |            |
| o |                                        |            |            |
| p |                                        |            |            |
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| r |                                        |            |            |
| t |                                        |            |            |
| y |                                        |            |            |
| , |                                        |            |            |
| P |                                        |            |            |
| l |                                        |            |            |
| a |                                        |            |            |
| n |                                        |            |            |
| t |                                        |            |            |
| a |                                        |            |            |
| n |                                        |            |            |
| d |                                        |            |            |
| E |                                        |            |            |
| q |                                        |            |            |
| u |                                        |            |            |
| i |                                        |            |            |
| p |                                        |            |            |
| m |                                        |            |            |
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| n |                                        |            |            |
| t |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   | Telecommunications Plant in Service    | 22,800,000 | 20,100,000 |
|   | (Note 5)                               |            |            |
+---+----------------------------------------+------------+------------+
|   | Telecommunications Plant Under         | 1,200,000  | 1,100,000  |
|   | Construction                           |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        | 24,000,000 | 21,200,000 |
+---+----------------------------------------+------------+------------+
|   | Accumulated Provision for Depreciation | 8,500,000  | 7,200,000  |
+---+----------------------------------------+------------+------------+
|   | Total Property, Plant and Equipment    | 15,500,000 | 14,000,000 |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        | \$         | \$         |
| * |                                        | 18,982,000 | 17,162,000 |
| T |                                        |            |            |
| o |                                        |            |            |
| t |                                        |            |            |
| a |                                        |            |            |
| l |                                        |            |            |
| A |                                        |            |            |
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| e |                                        |            |            |
| t |                                        |            |            |
| s |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+

The accompanying notes are an integral part of these statements.

+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
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| I |                                         |            |           |
| N |                                         |            |           |
| G |                                         |            |           |
| S |                                         |            |           |
| ( |                                         |            |           |
| N |                                         |            |           |
| o |                                         |            |           |
| t |                                         |            |           |
| e |                                         |            |           |
| 2 |                                         |            |           |
| ) |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         | 20X1       | 20X0      |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| C |                                         |            |           |
| u |                                         |            |           |
| r |                                         |            |           |
| r |                                         |            |           |
| e |                                         |            |           |
| n |                                         |            |           |
| t |                                         |            |           |
| L |                                         |            |           |
| i |                                         |            |           |
| a |                                         |            |           |
| b |                                         |            |           |
| i |                                         |            |           |
| l |                                         |            |           |
| i |                                         |            |           |
| t |                                         |            |           |
| i |                                         |            |           |
| e |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Accounts Payable                        | \$320,000  | \$324,000 |
+---+-----------------------------------------+------------+-----------+
|   | Customer Deposits                       | 33,000     | 30,000    |
+---+-----------------------------------------+------------+-----------+
|   | Current portion of long-term debt       | 579,000    | 449,000   |
+---+-----------------------------------------+------------+-----------+
|   | Accrued Taxes                           | 500        | 49,800    |
+---+-----------------------------------------+------------+-----------+
|   | Other Current Liabilities               | 22,000     | 15,000    |
+---+-----------------------------------------+------------+-----------+
|   | Total Current Liabilities               | 954,500    | 867,800   |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| L |                                         |            |           |
| o |                                         |            |           |
| n |                                         |            |           |
| g |                                         |            |           |
| - |                                         |            |           |
| t |                                         |            |           |
| e |                                         |            |           |
| r |                                         |            |           |
| m |                                         |            |           |
| d |                                         |            |           |
| e |                                         |            |           |
| b |                                         |            |           |
| t |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | RUS Mortgage Notes, less current        | 8,900,000  | 8,100,000 |
|   | portion (Note 6)                        |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Accrued Postretirement benefits (Note   | 664,000    | 503,000   |
|   | 7)                                      |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Total Long-term liabilities             | 9,564,000  | 8,603,000 |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| O |                                         |            |           |
| t |                                         |            |           |
| h |                                         |            |           |
| e |                                         |            |           |
| r |                                         |            |           |
| L |                                         |            |           |
| i |                                         |            |           |
| a |                                         |            |           |
| b |                                         |            |           |
| i |                                         |            |           |
| l |                                         |            |           |
| i |                                         |            |           |
| t |                                         |            |           |
| i |                                         |            |           |
| e |                                         |            |           |
| s |                                         |            |           |
| a |                                         |            |           |
| n |                                         |            |           |
| d |                                         |            |           |
| D |                                         |            |           |
| e |                                         |            |           |
| f |                                         |            |           |
| e |                                         |            |           |
| r |                                         |            |           |
| r |                                         |            |           |
| e |                                         |            |           |
| d |                                         |            |           |
| C |                                         |            |           |
| r |                                         |            |           |
| e |                                         |            |           |
| d |                                         |            |           |
| i |                                         |            |           |
| t |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Deferred Income Taxes (Note 8)          | 190,000    | 176,000   |
+---+-----------------------------------------+------------+-----------+
|   | Other                                   | 110,000    | 98,000    |
+---+-----------------------------------------+------------+-----------+
|   | Total Other Liabilities and Deferred    | 300,000    | 274,000   |
|   | Credits                                 |            |           |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         |            |           |
| * |                                         |            |           |
| S |                                         |            |           |
| t |                                         |            |           |
| o |                                         |            |           |
| c |                                         |            |           |
| k |                                         |            |           |
| h |                                         |            |           |
| o |                                         |            |           |
| l |                                         |            |           |
| d |                                         |            |           |
| e |                                         |            |           |
| r |                                         |            |           |
| \ |                                         |            |           |
| ' |                                         |            |           |
| s |                                         |            |           |
| E |                                         |            |           |
| q |                                         |            |           |
| u |                                         |            |           |
| i |                                         |            |           |
| t |                                         |            |           |
| i |                                         |            |           |
| e |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Capital Stock - Common \$100 par        |            |           |
|   | value-5,000\                            |            |           |
|   | shares authorized; 3,500 outstanding    |            |           |
|   | 20X1                                    |            |           |
+---+-----------------------------------------+------------+-----------+
|   | and 20X0                                | 350,000    | 350,000   |
+---+-----------------------------------------+------------+-----------+
|   | Additional Paid-in Capital              | 250,000    | 250,000   |
+---+-----------------------------------------+------------+-----------+
|   | Retained Earnings                       | 7,560,500  | 6,814,800 |
+---+-----------------------------------------+------------+-----------+
|   | Accumulated Other Comprehensive Income  | 3,000      | 2,400     |
|   | (Loss)                                  |            |           |
+---+-----------------------------------------+------------+-----------+
|   | Total Stockholder's Equities            | 8,163,500  | 7,417,200 |
+---+-----------------------------------------+------------+-----------+
|   |                                         |            |           |
+---+-----------------------------------------+------------+-----------+
| * |                                         | \$         | \$1       |
| * |                                         | 18,982,000 | 7,162,000 |
| T |                                         |            |           |
| o |                                         |            |           |
| t |                                         |            |           |
| a |                                         |            |           |
| l |                                         |            |           |
| E |                                         |            |           |
| q |                                         |            |           |
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| i |                                         |            |           |
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| a |                                         |            |           |
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| d |                                         |            |           |
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| a |                                         |            |           |
| b |                                         |            |           |
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| t |                                         |            |           |
| i |                                         |            |           |
| e |                                         |            |           |
| s |                                         |            |           |
| * |                                         |            |           |
| * |                                         |            |           |
+---+-----------------------------------------+------------+-----------+

The accompanying notes are an integral part of these statements.

+---+----------------------------------------+------------+------------+
| * |                                        |            |            |
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| R |                                        |            |            |
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| * |                                        |            |            |
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| * |                                        |            |            |
| * |                                        |            |            |
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| D |                                        |            |            |
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| D |                                        |            |            |
| D |                                        |            |            |
| E |                                        |            |            |
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| E |                                        |            |            |
| M |                                        |            |            |
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| R |                                        |            |            |
| 3 |                                        |            |            |
| 1 |                                        |            |            |
| , |                                        |            |            |
| 2 |                                        |            |            |
| 0 |                                        |            |            |
| X |                                        |            |            |
| 1 |                                        |            |            |
| a |                                        |            |            |
| n |                                        |            |            |
| d |                                        |            |            |
| 2 |                                        |            |            |
| 0 |                                        |            |            |
| X |                                        |            |            |
| 0 |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        | 20X1       | 20X0       |
+---+----------------------------------------+------------+------------+
| * |                                        |            |            |
| * |                                        |            |            |
| O |                                        |            |            |
| p |                                        |            |            |
| e |                                        |            |            |
| r |                                        |            |            |
| a |                                        |            |            |
| t |                                        |            |            |
| i |                                        |            |            |
| n |                                        |            |            |
| g |                                        |            |            |
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| v |                                        |            |            |
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| n |                                        |            |            |
| u |                                        |            |            |
| e |                                        |            |            |
| s |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   | Local Network Services                 | \          | \$924,000  |
|   |                                        | $1,481,000 |            |
+---+----------------------------------------+------------+------------+
|   | Network Access Services                | 3,706,700  | 3,023,800  |
+---+----------------------------------------+------------+------------+
|   | Billing and Collection Services        | 306,000    | 279,000    |
+---+----------------------------------------+------------+------------+
|   | Miscellaneous                          | 206,000    | 139,000    |
+---+----------------------------------------+------------+------------+
|   | Less: Uncollectible Revenues           | (26,000)   | (22,000)   |
+---+----------------------------------------+------------+------------+
|   | Total Operating Revenues               | \          | \          |
|   |                                        | $5,673,700 | $4,343,800 |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        |            |            |
| * |                                        |            |            |
| O |                                        |            |            |
| p |                                        |            |            |
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| r |                                        |            |            |
| a |                                        |            |            |
| t |                                        |            |            |
| i |                                        |            |            |
| n |                                        |            |            |
| g |                                        |            |            |
| E |                                        |            |            |
| x |                                        |            |            |
| p |                                        |            |            |
| e |                                        |            |            |
| n |                                        |            |            |
| s |                                        |            |            |
| e |                                        |            |            |
| s |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   | Plant Specific Operations              | 976,000    | 676,000    |
+---+----------------------------------------+------------+------------+
|   | Plant Nonspecific Operations           | 222,000    | 174,000    |
+---+----------------------------------------+------------+------------+
|   | Depreciation and Amortization          | 1,341,000  | 855,000    |
+---+----------------------------------------+------------+------------+
|   | Customer Operations                    | 737,000    | 544,000    |
+---+----------------------------------------+------------+------------+
|   | Corporate Operations                   | 1,034,000  | 809,000    |
+---+----------------------------------------+------------+------------+
|   | Other Taxes                            | 26,000     | 36,000     |
+---+----------------------------------------+------------+------------+
|   | Total Operating Expenses               | 4,336,000  | 3,094,000  |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        | \          | \          |
| * |                                        | $1,337,700 | $1,249,800 |
| O |                                        |            |            |
| p |                                        |            |            |
| e |                                        |            |            |
| r |                                        |            |            |
| a |                                        |            |            |
| t |                                        |            |            |
| i |                                        |            |            |
| n |                                        |            |            |
| g |                                        |            |            |
| I |                                        |            |            |
| n |                                        |            |            |
| c |                                        |            |            |
| o |                                        |            |            |
| m |                                        |            |            |
| e |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        |            |            |
| * |                                        |            |            |
| O |                                        |            |            |
| t |                                        |            |            |
| h |                                        |            |            |
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| r |                                        |            |            |
| I |                                        |            |            |
| n |                                        |            |            |
| c |                                        |            |            |
| o |                                        |            |            |
| m |                                        |            |            |
| e |                                        |            |            |
| ( |                                        |            |            |
| E |                                        |            |            |
| x |                                        |            |            |
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| n |                                        |            |            |
| s |                                        |            |            |
| e |                                        |            |            |
| ) |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   | Interest and dividend income           | 238,000    | 236,000    |
+---+----------------------------------------+------------+------------+
|   | Interest expense                       | (489,000)  | (429,000)  |
+---+----------------------------------------+------------+------------+
|   | Interest during construction           | 53,000     | 28,000     |
+---+----------------------------------------+------------+------------+
|   | Net Other Income and Expenses          | (198,000)  | (165,000)  |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        | \          | \          |
| * |                                        | $1,139,700 | $1,084,800 |
| I |                                        |            |            |
| n |                                        |            |            |
| c |                                        |            |            |
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| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        | 126,000    | 81,000     |
| * |                                        |            |            |
| I |                                        |            |            |
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| c |                                        |            |            |
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+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        | \          | \          |
| * |                                        | $1,013,700 | $1,003,800 |
| N |                                        |            |            |
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| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        | 33,000     | 27,000     |
| * |                                        |            |            |
| N |                                        |            |            |
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| n |                                        |            |            |
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| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        | \          | \          |
| * |                                        | $1,046,700 | $1,030,800 |
| N |                                        |            |            |
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| d |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        | 6,814,800  | 6,053,000  |
| * |                                        |            |            |
| R |                                        |            |            |
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| a |                                        |            |            |
| r |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        | 301,000    | 269,000    |
| * |                                        |            |            |
| D |                                        |            |            |
| i |                                        |            |            |
| v |                                        |            |            |
| i |                                        |            |            |
| d |                                        |            |            |
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| n |                                        |            |            |
| d |                                        |            |            |
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| d |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        | \          | \          |
| * |                                        | $7,560,500 | $6,814,800 |
| R |                                        |            |            |
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| t |                                        |            |            |
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| i |                                        |            |            |
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| d |                                        |            |            |
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| a |                                        |            |            |
| r |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+

The accompanying notes are an integral part of these statements.

+---+----------------------------------------+------------+------------+
| * |                                        |            |            |
| * |                                        |            |            |
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+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        | 20X1       | 20X0       |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        | \          | \          |
| * |                                        | $1,046,700 | $1,030,800 |
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+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        |            |            |
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| e |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   | Unrealized holding gains (losses)      | 600        | 1,500      |
|   | arising during the year                |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        | \          | \          |
| * |                                        | $1,047,300 | $1,032,300 |
| C |                                        |            |            |
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+---+----------------------------------------+------------+------------+

The accompanying notes are an integral part of these statements.

+---+----------------------------------------+------------+------------+
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+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        | 20X1       | 20X0       |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        |            |            |
| * |                                        |            |            |
| C |                                        |            |            |
| A |                                        |            |            |
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| I |                                        |            |            |
| N |                                        |            |            |
| G |                                        |            |            |
| A |                                        |            |            |
| C |                                        |            |            |
| T |                                        |            |            |
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| I |                                        |            |            |
| T |                                        |            |            |
| I |                                        |            |            |
| E |                                        |            |            |
| S |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   | Cash Received from Consumers           | \          | \          |
|   |                                        | $5,382,000 | $4,276,000 |
+---+----------------------------------------+------------+------------+
|   | Cash Paid to Suppliers and Employees   | (          | (          |
|   |                                        | 2,580,400) | 2,026,200) |
+---+----------------------------------------+------------+------------+
|   | Interest Received                      | 238,000    | 236,000    |
+---+----------------------------------------+------------+------------+
|   | Interest Paid                          | (489,000)  | (429,000)  |
+---+----------------------------------------+------------+------------+
|   | Taxes Paid                             | (141,500)  | (94,000)   |
+---+----------------------------------------+------------+------------+
|   | Net Cash Provided by Operating         | 2,409,100  | 1,962,800  |
|   | Activities                             |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        |            |            |
| * |                                        |            |            |
| C |                                        |            |            |
| A |                                        |            |            |
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| H |                                        |            |            |
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| A |                                        |            |            |
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| I |                                        |            |            |
| T |                                        |            |            |
| I |                                        |            |            |
| E |                                        |            |            |
| S |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   | Construction and Acquisition of Plant  | (          | (          |
|   |                                        | 2,612,000) | 2,523,000) |
+---+----------------------------------------+------------+------------+
|   | Plant Removal Costs                    | (229,000)  | (82,000)   |
+---+----------------------------------------+------------+------------+
|   | (Increase) Decrease In:                |            |            |
+---+----------------------------------------+------------+------------+
|   | Materials Inventory                    | (40,000)   | (58,000)   |
+---+----------------------------------------+------------+------------+
|   | Investments in Marketable Securities   | (37,900)   | (34,500)   |
+---+----------------------------------------+------------+------------+
|   | Other Investments                      | (100,000)  | (135,000)  |
+---+----------------------------------------+------------+------------+
|   | Deferred Charges                       | (27,000)   | 23,000     |
+---+----------------------------------------+------------+------------+
|   | Nonregulated Income                    | 33,000     | 27,000     |
+---+----------------------------------------+------------+------------+
|   | Net Cash Used in Investing Activities  | (          | (          |
|   |                                        | 3,012,900) | 2,782,500) |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
| * |                                        |            |            |
| * |                                        |            |            |
| C |                                        |            |            |
| A |                                        |            |            |
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| H |                                        |            |            |
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| F |                                        |            |            |
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| A |                                        |            |            |
| N |                                        |            |            |
| C |                                        |            |            |
| I |                                        |            |            |
| N |                                        |            |            |
| G |                                        |            |            |
| A |                                        |            |            |
| C |                                        |            |            |
| T |                                        |            |            |
| I |                                        |            |            |
| V |                                        |            |            |
| I |                                        |            |            |
| T |                                        |            |            |
| I |                                        |            |            |
| E |                                        |            |            |
| S |                                        |            |            |
| * |                                        |            |            |
| * |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   | Dividends Paid                         | (301,000)  | (269,000)  |
+---+----------------------------------------+------------+------------+
|   | Debt Proceeds                          | 1,379,000  | 1,158,000  |
+---+----------------------------------------+------------+------------+
|   | Payments on Long-Term Debt             | (449,000)  | (444,000)  |
+---+----------------------------------------+------------+------------+
|   | Increase/(Decrease) In:                |            |            |
+---+----------------------------------------+------------+------------+
|   | Consumer Deposits and Advance Payments | 3,000      | 13,000     |
+---+----------------------------------------+------------+------------+
|   | Net Cash Provided by Financing         | 632,000    | 458,000    |
|   | Activities                             |            |            |
+---+----------------------------------------+------------+------------+
|   |                                        |            |            |
+---+----------------------------------------+------------+------------+
|   | Net Increase/(Decrease) in Cash        | 28,200     | (361,700)  |
+---+----------------------------------------+------------+------------+
|   | Cash - Beginning of Year               | 32,300     | 394,000    |
+---+----------------------------------------+------------+------------+
|   | Cash - End of Year                     | 60,500     | 32,300     |
+---+----------------------------------------+------------+------------+

The accompanying notes are an integral part of these statements.

  ------------------ ----------------------------------------- ------------- -------------
  **RECONCILIATION                                             20X1          20X0
  OF NET MARGINS TO                                                          
  NET CASH PROVIDED                                                          
  BY OPERATING                                                               
  ACTIVITIES**                                                               

  **Net Margins**                                              \$1,046,700   \$1,030,800

                     Less: Nonregulated Income                 33,000        27,000

                     Net Income from Regulated Operations      1,013,700     1,003,800

                                                                             

                     Adjustments to Reconcile Net Margins to                 
                     Net                                                     

                     Cash Provided by Operating Activities:                  

                     Depreciation and Amortization             1,341,000     855,000

                     Provision for Uncollectible Accounts      1,000         1,000
                     Receivable                                              

                     Accumulated Provision for Pensions and    161,000       133,000
                     Benefits                                                

                     (Increase)/Decrease In:                                 

                     Customer and Other Accounts Receivable    (74,000)      (69,000)

                     Current and Accrued Assets -- Other       5,000         15,000

                     Prepayments                               (18,300)      15,000

                     Increase/(Decrease) In:                                 

                     Accounts Payable                          (4,000)       29,000

                     Accrued Taxes                             (49,300)      (13,000)

                     Other Current and Accrued Liabilities     7,000         (2,000)

                     Deferred Credits                          26,000        (5,000)

                     Total Adjustments                         1,395,400     959,000

  **Net Cash                                                   \$2,409,100   \$1,962,800
  Provided by                                                                
  Operating                                                                  
  Activities**                                                               
  ------------------ ----------------------------------------- ------------- -------------

The accompanying notes are an integral part of these statements.

**CENTER COUNTY TELECOMMUNICATIONS SYSTEMS, INC.**

**NOTES TO FINANCIAL STATEMENTS**

**DECEMBER 31, 20X1 AND 20X0**

**1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

> Include a brief description of the reporting entity's significant
> accounting policies in accordance with Accounting Principles Board
> Opinion No. 22, Disclosure of Accounting Policies.
>
> Disclosure of accounting policies should identify and describe the
> accounting principles followed by the borrower and the methods of
> applying those principles that materially affect the determination of
> financial position, cash flow, and results of operations.
>
> Disclosures of accounting policies do not have to be duplicated in
> this section if presented elsewhere as an integral part of the
> financial statements.

**2. ASSETS PLEDGED:**

> Substantially all assets are pledged as security for long-term debt to
> RUS.

**3. PREPAID EXPENSES:**

> Following is a summary of the amounts recorded as prepaid items as of
> December 31, 20X1 and 20X0:

+---------------------------------------------------+--------+---------+
|                                                   | # 20X1 | # 20X0  |
+---------------------------------------------------+--------+---------+
| Prepaid Taxes                                     | \$     | \       |
|                                                   | 10,000 | $10,000 |
+---------------------------------------------------+--------+---------+
| Prepaid Insurance                                 | 3,000  | 1,700   |
+---------------------------------------------------+--------+---------+
| Prepaid Rent                                      | 37,000 | 20,000  |
+---------------------------------------------------+--------+---------+
|                                                   | \$     | \       |
|                                                   | 50,000 | $31,700 |
+---------------------------------------------------+--------+---------+

**4. INVESTMENTS:**

> **MARKETABLE DEBT AND EQUITY SECURITIES:**
>
> Center County Telecommunications Systems, Inc., has adopted SFAS No.
> 115, "Accounting for Certain Investments in Debt and Equity
> Securities." In accordance with SFAS No. 115, the company has
> classified all the Other Investments as available-for-sale.
> Available-for-sale investments are stated at fair value with
> unrealized gains and losses included in stockholder\'s equities. The
> cost of investments sold is based on the specific identification
> method.
>
> The cost and fair values of marketable securities available-for-sale
> at December 31, 20X1 and 20X0 were:

+-----------------------+----------+----------+----------+----------+
|                       | # 20X1   |          |          |          |
+-----------------------+----------+----------+----------+----------+
| Description           | Am       | Gross\   | Gross\   | Fair\    |
|                       | ortized\ | Un       | Un       | Value    |
|                       | Cost     | realized | realized |          |
|                       |          | Gain     | Loss     |          |
+-----------------------+----------+----------+----------+----------+
| U.S. Government       | \$       | \$2,900  | \$900    | \$       |
| Treasury securities   | 62,500   |          |          | 64,500   |
+-----------------------+----------+----------+----------+----------+
| Certificate of        | 420,000  |          |          | 420,000  |
| Deposit               |          |          |          |          |
+-----------------------+----------+----------+----------+----------+
| Debt Securities       | 280,000  | 6,000    | 3,000    | 283,000  |
+-----------------------+----------+----------+----------+----------+
|                       | \        | \$8,900  | \$3,900  | \        |
|                       | $762,500 |          |          | $767,500 |
+-----------------------+----------+----------+----------+----------+
|                       | # 20X0   |          |          |          |
+-----------------------+----------+----------+----------+----------+
| Description           | Am       | Gross\   | Gross\   | Fair\    |
|                       | ortized\ | Un       | Un       | Value    |
|                       | Cost     | realized | realized |          |
|                       |          | Gain     | Loss     |          |
+-----------------------+----------+----------+----------+----------+
| U.S. Government       | \$       | \$1,200  | \$200    | \$       |
| Treasury securities   | 68,000   |          |          | 69,000   |
+-----------------------+----------+----------+----------+----------+
| Certificate of        | 408,000  |          |          | 408,000  |
| Deposit               |          |          |          |          |
+-----------------------+----------+----------+----------+----------+
| Debt Securities       | 249,000  | 5,000    | 2,000    | 252,000  |
+-----------------------+----------+----------+----------+----------+
|                       | \        | \$6,200  | \$2,200  | \        |
|                       | $725,000 |          |          | $729,000 |
+-----------------------+----------+----------+----------+----------+

> At December 31, 20X1, maturities of investments classified as
> available-for-sale were as follows:

  ------------------------------------------ -------------- --------------
                                             Amortized\     Fair\
                                             Cost           Value

  Less than One Year                         \$ 25,000      \$ 26,000

  One through Five Years                     681,000        684,000

  After Five Years                           56,500         57,500

  Total                                      \$762,500      \$767,500
  ------------------------------------------ -------------- --------------

> As of December 31, 20X1 and 20X0, the amount of unrealized gains on
> available for sale securities included in accumulated other
> comprehensive income is shown net of deferred income taxes of \$2,000
> and \$1,600, respectively.
>
> **NONREGULATED INVESTMENTS:**
>
> Investments in nonregulated activities consist of the following:

+-----------------------------------------+-------------+-------------+
|                                         | # 20X1      | # 20X0      |
+-----------------------------------------+-------------+-------------+
| Customer Premises Equipment             | \$ 493,000  | \$ 500,000  |
+-----------------------------------------+-------------+-------------+
| CATV equipment                          | 650,000     | 678,000     |
+-----------------------------------------+-------------+-------------+
| Cellular facilities                     | 1,329,000   | 1,047,000   |
+-----------------------------------------+-------------+-------------+
| Other                                   | 28,000      | 35,000      |
+-----------------------------------------+-------------+-------------+
| Total Nonregulated Investments          | \$2,500,000 | \$2,260,000 |
+-----------------------------------------+-------------+-------------+
| Less: Accumulated Depreciation          | 950,000     | 810,000     |
+-----------------------------------------+-------------+-------------+
|                                         | \$1,550,000 | \$1,450,000 |
+-----------------------------------------+-------------+-------------+

> Nonregulated property is stated at cost. The company provides for
> depreciation on a straight-line basis at annual rates which will
> amortize the depreciable property over its estimated useful life.
>
> Following is a summary of net income from nonregulated investments for
> the year ending December 31, 20X1 and 20X0

+-----------------------------------------+-------------+-------------+
|                                         | 20X1        | # 20X0      |
+-----------------------------------------+-------------+-------------+
| Income                                  | # \$400,000 | # \$268,000 |
+-----------------------------------------+-------------+-------------+
| Expenses                                | 367,000     | 241,000     |
+-----------------------------------------+-------------+-------------+
|                                         | \$ 33,000   | \$ 27,000   |
+-----------------------------------------+-------------+-------------+

> Income tax expense related to these activities totaled \$15,000 in
> 20X1 and \$12,000 in 20X0.

**5. INVESTMENT IN TELEPHONE PLANT:**

> Telephone Plant in Service and under construction is stated at cost.
> Listed below are the major classes of the telecommunications plant as
> of December 31, 20X1 and 20X0:

+-----------------------------------------+-------------+-------------+
|                                         | # 20X1      | # 20X0      |
+-----------------------------------------+-------------+-------------+
| Land                                    | \$ 185,000  | \$ 185,000  |
+-----------------------------------------+-------------+-------------+
| Buildings                               | 1,385,000   | 1,435,000   |
+-----------------------------------------+-------------+-------------+
| Central Office Equipment                | 9,929,000   | 8,379,000   |
+-----------------------------------------+-------------+-------------+
| Outside Plant                           | 10,226,000  | 9,120,000   |
+-----------------------------------------+-------------+-------------+
| Furniture and Office Equipment          | 352,000     | 256,000     |
+-----------------------------------------+-------------+-------------+
| Vehicles and Work Equipment             | 723,000     | 725,000     |
+-----------------------------------------+-------------+-------------+
|                                         | \           | \           |
|                                         | $22,800,000 | $20,100,000 |
+-----------------------------------------+-------------+-------------+

> The company provides for depreciation on a straight-line basis at
> annual rates which will amortize the depreciable property over its
> estimated useful life. Such provision, as a percentage of the average
> balance of telephone plant in service was 7.2 percent in 20X1 and 7.1
> percent in 20X0.

**6. MORTGAGE NOTES:**

> Long-term debt is represented by mortgage notes payable to the United
> States of America. Following is a summary of outstanding long-term
> debt as of December 31, 20X1 and 20X0:

  ------------------------------------------ -------------- --------------
                                             20X1           20X0

  2% Notes due September 30, 20X8            \$2,495,000    \$2,373,000

  5% Notes due March 31, 20X12               6,984,000      6,176,000

                                             \$9,479,000    \$8,549,000

  Less: Current Maturities                   579,000        449,000

                                             \$8,900,000    \$8,100,000
  ------------------------------------------ -------------- --------------

As of December 31, 20X1, there were no unadvanced funds.

> Principal and interest installments on the above notes are due
> quarterly in equal amounts of \$254,000. As of December 31, 20X1,
> annual maturities of long-term debt outstanding for the next five
> years are as follows:

  ------------------------------------------------------------ -----------
  20X2                                                         \$579,000

  20X3                                                         600,000

  20X4                                                         612,000

  20X5                                                         624,000

  20X6                                                         637,000
  ------------------------------------------------------------ -----------

> The long-term debt agreements contain restrictions on the payment of
> dividends or redemption of capital stock. The terms of the Mortgage
> Agreement require the maintenance of defined amounts in member\'s
> equity and working capital after payment of dividends.

**7. EMPLOYEE BENEFITS:**

> Substantially all of the employees of the Company are covered by the
> ABC Retirement and Security Program, a multiemployer plan.
>
> In addition to pension contributions the Company provides health care
> benefits for substantially all retired employees and dependents until
> they reach age 65.
>
> **The following illustrates the pension and postretirement benefits
> plans for the year ended December 31, 20X1 and 20X0.**

  ------------------------ ------------- ------------- ------------- -------------
                           Pension                     Other         
                           Benefits                    Benefits      

                           20X1          20X0          20X1          20X0

  Change in benefit                                                  
  obligation                                                         

  Benefit obligation       \$1,871,000   \$1,841,000   \$1,552,000   \$1,464,000
  beginning of year                                                  

  Service Cost             115,000       145,000       39,000        39,000

  Interest Cost            95,000        86,000        104,000       104,000

  Actuarial Gain           (490,000)     (157,000)                   

  Benefits Paid            (6,000)       (43,000)      (58,000)      (56,000)

  Benefit obligation at    \$1,585,000   \$1,872,000   \$1,637,000   \$1,551,000
  end of year                                                        

                                                                     

  Change in plan assets                                              

  Fair value of plan       \$461,000     \$281,000     \$0           \$0
  assets beginning of year                                           

  Actual return on plan    45,000        21,000                      
  assets                                                             

  Employer Contribution    144,000       203,000       58,000        56,000

  Benefits Paid            (6,000)       (43,000)      (58,000)      (56,000)

  Fair value of plan       \$644,000     \$462,000     \$0           \$0
  assets at end of year                                              
  ------------------------ ------------- ------------- ------------- -------------

  ------------------------ ------------- --------------- --------------- ---------------
  Funded status            \$(941,000)   \$(1,410,000)   \$(1,637,000)   \$(1,551,000)

  Unrecognized net         (97,000)      428,000                         
  actuarial loss(gain)                                                   

  Unrecognized prior       627,000       654,000                         
  service cost                                                           

  Unrecognized transition                                973,000         1,048,000
  obligation                                                             

  Prepaid (Accrued)        \$(411,000)   \$(328,000)     \$(664,000)     \$(503,000)
  benefit cost                                                           

  Weighted-average                                                       
  assumptions as of\                                                     
  December 31                                                            

  Discount rate            6.75%         5.50%           8.00%           8.00%

  Expected return on plan  6.50%         6.00%                           
  assets                                                                 

  Rate of compensation     5.00%         5.50%           6.00%           6.00%
  increase                                                               

                                                                         

  Components of net                                                      
  periodic benefit cost                                                  

  Service cost             \$115,000     \$145,000       \$39,000        \$39,000

  Interest cost            95,000        86,000          104,000         104,000

  Expected return on plan  (33,000)      (22,000)                        
  assets                                                                 

  Amortization of prior    27,000        27,000                          
  service cost                                                           

  Amortization of                                        75,000          75,000
  transition obligation                                                  

  Recognized net actuarial 24,000        (28,000)                        
  loss                                                                   

  Net periodic benefit     \$228,000     \$208,000       \$218,000       \$218,000
  cost                                                                   
  ------------------------ ------------- --------------- --------------- ---------------

**8. INCOME TAXES AND DEFERRED INCOME TAXES:**

> Deferred income taxes reflect the net tax effects of temporary
> differences between the carrying amount of the company\'s assets and
> liabilities for financial reporting basis and the amounts used for
> income tax purposes.
>
> Deferred federal and state tax assets and liabilities in the
> accompanying balance sheet include the following:

+-----------------------------------------------+----------+----------+
|                                               | December |          |
|                                               | 31,      |          |
+-----------------------------------------------+----------+----------+
|                                               | 20X1     | 20X0     |
+-----------------------------------------------+----------+----------+
| Deferred Tax Liabilities:                     | #        | #        |
+-----------------------------------------------+----------+----------+
| Federal                                       | \        | \        |
|                                               | $192,000 | $152,000 |
+-----------------------------------------------+----------+----------+
| State                                         | 31,000   | 25,000   |
+-----------------------------------------------+----------+----------+

  ----------------------------------------------- ----------- -----------
  Total Deferred Tax Liabilities                  223,000     177,000

  Deferred Tax Assets                                         

  Federal                                         28,000      700

  State                                           5,000       300

  Total Deferred Tax Assets                       33,000      1,000

  Net Deferred Tax Liability                      \$190,000   \$176,000

                                                              

  Current Portion                                 \$ 0        \$ 0

  Long-term portion                               190,000     176,000

  Net Deferred Tax Liability                      \$190,000   \$176,000
  ----------------------------------------------- ----------- -----------

Income taxes reflected in the Statement of Income and Retained Earnings
include:

+-----------------------------------------------+----------+----------+
|                                               | # Dece   |          |
|                                               | mber 31, |          |
+-----------------------------------------------+----------+----------+
|                                               | 20X1     | 20X0     |
+-----------------------------------------------+----------+----------+
| Federal income taxes:                         |          |          |
+-----------------------------------------------+----------+----------+
| Current tax expense                           | \$       | \$       |
|                                               | 103,000  | 71,000   |
+-----------------------------------------------+----------+----------+
| Deferred tax expense                          | 10,000   | 5,000    |
+-----------------------------------------------+----------+----------+
| State income taxes:                           |          |          |
+-----------------------------------------------+----------+----------+
| Current tax expense                           | 12,000   | 6,000    |
+-----------------------------------------------+----------+----------+
| Deferred tax expense                          | 1,000    | (1,000)  |
+-----------------------------------------------+----------+----------+
| Total income tax expense                      | \$       | \$       |
|                                               | 126,000  | 81,000   |
+-----------------------------------------------+----------+----------+

**9. COMMITMENTS:**

> The company has executed contracts for construction programs for
> approximately \$1,600,000 at December 31, 20X1. The amount unpaid
> against these commitments at December 31, 20X1 is \$1,100,000.

EXHIBIT 5 - ILLUSTRATIVE INDEPENDENT AUDITOR'S

MANAGEMENT LETTER FOR TELECOMMUNICATIONS BORROWERS

RUS requires that CPAs auditing RUS borrowers provide a management
letter in accordance with §1773.33. This letter must be signed by the
CPA, bear the same date as the auditor's report, and be addressed to the
borrower's board of directors.

##  Illustrative Independent Auditors\' Management Letter for Telecommunications Borrowers

March 2, 20X2

Board of Directors

Center County Telecommunications Systems, Inc.

\[City, State\]

We have audited the financial statements of Center County
Telecommunications Systems, Inc. for the year ended December 31, 20X1,
and have issued our report thereon dated March 2, 20X2. We conducted our
audit in accordance with generally accepted auditing standards, the
standards applicable to financial audits contained in *Government
Auditing Standards* issued by the Comptroller General of the United
States, and 7 CFR part 1773, Policy on Audits of Rural Utilities Service
(RUS) Borrowers. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.

In planning and performing our audit of the financial statements of
Center County Telecommunications Systems, Inc. for the year ended
December 31, 20X1, we considered its internal control over financial
reporting in order to determine our auditing procedures for the purpose
of expressing an opinion on the financial statements and not to provide
assurance on the internal control over financial reporting.

Our consideration of the internal control over financial reporting would
not necessarily disclose all matters in the internal control over
financial reporting that might be material weaknesses. A material
weakness is a condition in which the design or operation of one or more
of the internal control components does not reduce to a relatively low
level the risk that misstatements in amounts that would be material in
relation to the financial statements being audited may occur and not be
detected within a timely period by employees in the normal course of
performing their assigned functions. We noted no matters involving the
internal control over financial reporting that we consider to be
material weaknesses. \[*If a material weakness was noted, refer the
reader to the independent auditors\' report on compliance and on
internal control over financial reporting*.\]

Section 1773.33 requires comments on specific aspects of the internal
control over financial reporting, compliance with specific RUS loan and
security instrument provisions, and other additional matters. We have
grouped our comments accordingly. In addition to obtaining reasonable
assurance about whether the financial statements are free from material
misstatements, at your request, we performed tests of specific aspects
of the internal control over financial reporting, of compliance with
specific RUS loan and security instrument provisions, and of additional
matters. The specific aspects of the internal control over financial
reporting, compliance with specific RUS loan and security instrument
provisions, and additional matters tested include, among other things,
the accounting procedures and records, materials control, compliance
with specific RUS loan and security instrument provisions set forth in 7
CFR 1773.33 (e)(2), and related party transactions and investments. In
addition, our audit of the financial statements also included the
procedures specified in 7 CFR 1773.38 - .45. Our objective was not to
provide an opinion on these specific aspects of the internal control
over financial reporting, compliance with specific RUS loan and security
instrument provisions, or additional matters, and accordingly, we
express no opinion thereon.

No reports other than our independent auditors\' report, and our
independent auditor's report on compliance and on internal control over
financial reporting, all dated March 2, 20X2 or summary of
recommendations related to our audit have been furnished to management.

Our comments on specific aspects of the internal control over financial
reporting, compliance with specific RUS loan and security instrument
provisions, and other additional matters as required by 7 CFR 1773.33
are presented below.

COMMENTS ON CERTAIN SPECIFIC ASPECTS OF THE INTERNAL CONTROL OVER
FINANCIAL REPORTING

We noted no matters regarding Center County Telecommunications Systems,
Inc.\'s internal control over financial reporting and its operation that
we consider to be a material weakness as previously defined with respect
to:

-   The accounting procedures and records \[*list other comments*\];

-   The process for accumulating and recording labor, material, and
    overhead costs, and the distribution of these costs to construction,
    retirement, and maintenance or other expense accounts \[*list other
    comments*\]; and

-   The materials control \[*List other comments*\].

COMMENTS ON COMPLIANCE WITH SPECIFIC RUS LOAN AND SECURITY INSTRUMENT
PROVISIONS

At your request, we have performed the procedures enumerated below with
respect to compliance with certain provisions of laws, regulations,
contracts, and grants. The procedures we performed are summarized as
follows:

\- Procedures performed with respect to the requirement for a borrower
to obtain written approval of the mortgagee to enter into any contract,
agreement or lease between the borrower and an affiliate of Center
County Telecommunications Systems, Inc. for the year ended December 31,
20X1:

1\. Obtained and read a borrower-prepared schedule of new written
contracts, agreements or leases entered into during the year between the
borrower and an affiliate as defined in §1773.33 (e)(2)(i).

2\. Reviewed Board of Director minutes to ascertain whether
board-approved written contracts are included in the borrower-prepared
schedule.

3\. Noted the existence of written RUS \[*and other mortgagee*\]
approval of each contract listed by the borrower.

\- Procedure performed with respect to the requirement to submit RUS
Form 479 to the RUS:

1\. Agreed amounts reported in Form 479 to Center County
Telecommunications Systems, Inc.\'s records.

The results of our tests indicate that, with respect to the items
tested, Center County Telecommunications Systems, Inc. complied, except
as noted below, in all material respects, with the specific RUS loan and
security instrument provisions referred to below. The specific
provisions tested, as well as any exceptions noted, include the
requirements that:

\- The borrower has obtained written approval of the RUS \[*and other
mortgagees*\] to enter into any contract, agreement or lease with an
affiliate as defined in §1773.33 (e)(2)(i) \[*list all exceptions*\];
and

\- The borrower has submitted its Form 479 to the RUS and the Form 479,
Financial and Statistical Report, as of December 31, 20X1, represented
by the borrower as having been submitted to RUS is in agreement with the
Center County Telecommunications Systems, Inc.\'s audited records in all
material respects \[*list all exceptions*\] \[*or if the audit year end
is other than December 31*\], appears reasonable based upon the audit
procedures performed \[*list all exceptions*\].

### COMMENTS ON OTHER ADDITIONAL MATTERS

In connection with our audit of the financial statements of Center
County Telecommunications Systems, Inc., nothing came to our attention
that caused us to believe that Center County Telecommunications Systems,
Inc. failed to comply with respect to:

\- The reconciliation of continuing property records to the controlling
general ledger plant accounts addressed at 7 CFR 1773.33 (c)(1) \[*list
all exceptions*\];

\- The clearing of the construction accounts and the accrual of
depreciation on completed construction addressed at 7 CFR 1773.33 (c)(2)
\[*list all exceptions*\];

\- The retirement of plant addressed at 7 CFR 1773.33 (c)(3) and (4)
\[*list all exceptions*\];

\- The approval of the sale, lease or transfer of capital assets and
disposition of proceeds for the sale or lease of plant, material, or
scrap addressed at 7 CFR 1773.33 (c)(5) \[*list all exceptions*\];

\- The disclosure of material related party transactions, in accordance
with Statement of Financial Accounting Standards No. 57, Related Party
Transactions, for the year ended December 31, 20X1, in the financial
statements referenced in the first paragraph of this report addressed at
7 CFR 1773.33 (e) \[*list all exceptions*\]; and

\- The detailed schedule of investments.

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The detailed schedule of
investments required by 7 CFR 1773.33 (i), and provided below, is
presented for purposes of additional analysis and is not a required part
of the basic financial statements. This information has been subjected
to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.

\[*The detailed schedule of investments would be included here. The
total of the investment in each company reported in this schedule must
agree with the detail investment subsidiary account(s)*.\]

This report is intended solely for the information and use of the board
of directors, 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