UNIVERSITY CORPORATION FOR ATMOSPHERIC RESEARCH. Consolidated Financial Statements and Reports Required by the Uniform Guidance

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1 Consolidated Financial Statements and Reports Required by the Uniform Guidance (With Independent Auditors Reports Thereon)

2 Table of Contents Independent Auditors Report 1 Consolidated Financial Statements: Page Consolidated Statements of Financial Position 3 Consolidated Statements of Activities 4 Consolidated Statements of Cash Flows 5 6 Reports Required by the Uniform Guidance Schedule of Expenditures of Federal Awards 30 Notes to Schedule of Expenditures of Federal Awards 37 Independent Auditors Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Consolidated Financial Statements Performed in Accordance with Government Auditing Standards 38 Independent Auditors Report on Compliance for the Major Federal Program; Report on Internal Control over Compliance; and Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance 40 Schedule of Findings and Questioned Costs 42

3 KPMG LLP Suite th Street Denver, CO Independent Auditors Report The Board of Trustees University Corporation for Atmospheric Research: Report on the Financial Statements We have audited the accompanying consolidated financial statements of the University Corporation for Atmospheric Research (UCAR), which comprise the consolidated statements of financial position as of, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the University Corporation for Atmospheric Research as of September 30, 2017 and 2016, and the changes in its net assets and its cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.

4 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 22, 2018 on our consideration of UCAR s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering UCAR s internal control over financial reporting and compliance. Denver, Colorado January 22,

5 Consolidated Statements of Financial Position Assets Current assets: Cash and cash equivalents $ 35,336 30,776 Investments (notes 2 and 10) Receivables: Government agencies 20,241 18,630 Other (net of allowance for doubtful accounts of $30 at 2017 and 2016) 2,984 4,083 Other current assets 1, Total current assets 59,774 55,081 Property (note 3): Land and improvements 9,295 9,196 Buildings 167, ,754 Building construction in process 313 3,534 Equipment 39,216 38,551 Total 216, ,035 Less accumulated depreciation on buildings and equipment (111,144) (102,315) Property, net 105, ,720 Other noncurrent assets: Investments (notes 2 and 10) 81,872 79,064 Total other noncurrent assets 81,872 79,064 Total assets $ 247, ,865 Liabilities and Net Assets Current liabilities: Accounts payable $ 7,354 6,725 Accrued vacation liability 12,420 12,288 Other accrued liabilities (note 11) 3,721 7,084 Deferred revenue 13,375 15,471 Current portion of bonds payable (notes 4 and 10) 3,748 5,183 Current portion of other obligations (notes 5 and 8) Total current liabilities 40,706 47,014 Noncurrent liabilities: Bonds payable (notes 4 and 10) 48,100 49,968 Accrued postretirement benefit obligation (note 7) 6,177 7,033 Other obligations (notes 5 and 8) Total noncurrent liabilities 54,423 57,235 Net assets: Unrestricted 150, ,629 Temporarily restricted 1,655 1,801 Permanently restricted (note 12) Total net assets 152, ,616 Total liabilities and net assets $ 247, ,865 See accompanying notes to consolidated financial statements. 3

6 Consolidated Statements of Activities Years ended Changes in unrestricted net assets: Revenue, gains, and other support: National Science Foundation Cooperative Agreement: National Science Foundation $ 127,911 96,381 Other federal government 8,285 14,065 Other federal government 92,669 85,421 Other nongovernment 16,810 12,592 Donated property 7 14 Other Investment income (note 2) 10,826 7,193 Total revenue and gains 256, ,738 Net assets released from restrictions 1, Total revenue, gains, and other support 257, ,666 Expenses and losses: Scientific programs and support facilities 222, ,982 Management and general expenses 25,697 24,689 Total expenses (note 9) 248, ,671 Loss on bond refunding (note 4) 1,017 Loss on disposal of property (net of proceeds from sale of assets) Realized (gain)/unrealized loss from derivative obligations (note 11) (1,028) 155 Total expenses and losses 248, ,859 Postretirement benefit-related changes other than net periodic costs (note 7) (198) 1,370 Increase in unrestricted net assets 9,566 8,437 Changes in temporarily restricted net assets: Other nongovernment revenue 1,098 1,472 Investment income (note 2) 8 Net assets released from restrictions (1,244) (928) (Decrease)/Increase in temporarily restricted net assets (146) 552 Change in net assets 9,420 8,989 Net assets, beginning of year 142, ,627 Net assets, end of year $ 152, ,616 See accompanying notes to consolidated financial statements. 4

7 Consolidated Statements of Cash Flows Years ended Cash flows from operating activities: Change in net assets $ 9,420 8,989 Adjustments to reconcile change in net assets to net cash provided by operating activities: Net realized and unrealized gains on investments (9,013) (5,792) Donated property (7) (14) Depreciation and amortization 10,584 10,724 Loss on bond refunding 1,017 Loss on disposal of property Net accretion of bonds payable premiums (353) (213) Changes in operating assets and liabilities: Receivables (512) (5,067) Other current assets (389) (156) Accounts payable Accrued liabilities (3,231) (3,865) Deferred revenue (2,096) 976 Accrued postretirement benefit obligation (856) (159) Net cash provided by operating activities 5,281 6,196 Cash flows from investing activities: Purchase of property and equipment (3,256) (6,749) Purchase of investments (64,606) (1,778) Proceeds from sale of investments 71,578 4,807 Change in cash and cash equivalents for investment in property and restricted funds 373 Net cash provided by/(used in) investing activities 3,716 (3,347) Cash flows from financing activities: Proceeds from issuance of bonds payable 36,214 Payments of bonds payable and to escrow agent (39,959) (6,195) Payments of other obligations (263) (263) Issuance of deferred bond charges (429) Net cash used in financing activities (4,437) (6,458) (Increase)/decrease in cash and cash equivalents 4,560 (3,609) Cash and cash equivalents, beginning of year 30,776 34,385 Cash and cash equivalents, end of year $ 35,336 30,776 Supplemental cash flow information: Interest paid $ 2,078 2,561 See accompanying notes to consolidated financial statements. 5

8 (1) Organization and Significant Accounting Policies (a) Organization The University Corporation for Atmospheric Research (UCAR) is a nonprofit membership corporation engaged in scientific and educational activities in atmospheric research and related fields. UCAR operates the National Center for Atmospheric Research (NCAR) under cooperative agreement with the National Science Foundation (NSF) and also operates other scientific projects funded principally by other U.S. government agencies. In connection with its operations, UCAR has incurred bond indebtedness (note 4) and other indebtedness and commitments (notes 5, 7, 8, and 11) for which repayment is primarily dependent upon funding by NSF and other U.S. government agencies. The ability of NSF and other U.S. government agencies in any year to provide moneys to UCAR is dependent on annual Congressional appropriations. UCAR is operating under a cooperative agreement with an expiration date of September 30, Performance of work under U.S. government awards may be terminated whenever the sponsoring government agency shall determine that such termination is in the best interest of the U.S. government. Funding under all federal awards is subject to availability of funding as determined by the U.S. Congress. UCAR s management is unaware of any significant changes to the cooperative agreement or other federal grants in the upcoming year that will significantly impact UCAR s cash flows and its ability to pay current obligations as they become due. The consolidated financial statements of UCAR include the University Corporation for Atmospheric Research Foundation (Foundation) and the UCAR Child Care LLC where UCAR is the single member. UCAR Child Care LLC was formed for the purpose of overseeing UCAR s child care facility and its outside operator. The Foundation was incorporated by UCAR for the purpose of engaging in technology transfer and other scientific, educational, and charitable activities in support of UCAR s mission. UCAR s board of trustees approves the election of the members of the board of directors of the Foundation. The Foundation s revenue relates primarily to license fees and royalties from transferred technology. In addition, the consolidated financial statements include an investment in Global Weather Corporation (GWC) (a wholesaler of precision weather information designed to meet the market need for personalized on-demand weather using NCAR s Research Applications Laboratory (RAL) DICast, LogiCast, and NowCast technologies) with the Foundation having 26.7% ownership (26.7% in 2016). GWC is accounted for under the equity method. In November 2016, the UCAR Foundation approved a resolution authorizing the sale of Advanced Radar Corporation (ARC) warrants whose assets were being acquired through an asset purchase agreement by Braxton Holdings, LLC and Braxton Science and Technology Group, LLC (together, Braxton). ARC purchased the warrants from the Foundation for $250,000 in cash, debt and stock, to redeem and cancel the warrants. (b) Basis of Presentation The accompanying consolidated financial statements have been prepared on the accrual basis of accounting. 6 (Continued)

9 The net assets, revenue, gains, and other support in the accompanying consolidated financial statements are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of UCAR and changes therein are classified and reported as follows: (i) (ii) (iii) Unrestricted Net Assets Unrestricted net assets are net assets not subject to donor-imposed restrictions. Temporarily Restricted Net Assets Temporarily restricted net assets are those whose use by UCAR has been limited by donors for a specific purpose, which is generally related to scientific and education activities in atmospheric research. Permanently Restricted Net Assets Permanently restricted net assets are those whose use by UCAR has been restricted by donors to be maintained permanently but permits UCAR to spend the income derived for a specific purpose, which is generally related to scientific and educational activities in atmospheric research. (c) Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (d) Cash and Cash Equivalents UCAR considers cash as not only currency on hand but also demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in which UCAR may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. Cash and cash equivalents include highly liquid investments with a maturity of three months or less. (e) Investments Investments in equity, government, and other fixed-income securities are measured at fair value in the consolidated statements of financial position. Fair value of alternative investments is based on information provided by the various fund managers. Investment income or loss (including realized and unrealized gains and losses, interest, and dividends) is included in the change in unrestricted net assets unless the income or loss is restricted by the donor or law. (f) Receivables from Government Agencies Receivables from government agencies consist of amounts owed to UCAR from the federal government based on costs incurred but not yet reimbursed under federal grants or cooperative agreement. No allowance is established for these receivables, as they are considered fully collectible from the federal government. 7 (Continued)

10 (g) Concentrations of Credit Risk UCAR s credit risk is primarily concentrated in receivables from the NSF and other U.S. government agencies. In the opinion of management, this concentration does not result in increased credit risk due to the nature of the receivables. (h) Property Property with title vested in UCAR is capitalized and recorded at cost if the acquisition cost is $5,000 or more. Donated property is recorded at estimated fair market value at the time of donation. Depreciation is provided using the straight-line method over the estimated useful lives of the property ranging from 3 to 40 years. Property with title vested in the federal government and other sponsors is not recorded in the consolidated statements of financial position (note 3). (i) Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value. For the years ended September 30, 2017 and 2016, management believes there has been no impairment of UCAR s long-lived assets. (j) Accrued Vacation Liability In accordance with Colorado State Statutes (Section , Definitions), UCAR is required to pay upon separation from employment all vacation and paid time off (PTO) leave earned in accordance with the terms of UCAR s leave policy. Vacation and PTO leave is 100% vested and accrues when earned based on the employee s length of service and/or job position. Earned leave is funded through an indirect cost rate application charged to scientific programs and scientific support facilities. UCAR has fully funded and recorded the accrued vacation and PTO liability in the accompanying consolidated financial statements. (k) Revenue and Expense Recognition Revenue from awards and contracts, considered to be exchange transactions, is recognized as revenue when expenses under the award or contract are incurred. Expenses charged to federal awards are subject to government agency audit and possible adjustment. In the opinion of management, such adjustments, if any, will not have a significant impact on the accompanying consolidated financial statements. (l) Functional Expenses UCAR s program expenses include scientific program s expenses and scientific support facilities. Scientific programs encompass basic and applied research, education and training, technology transfer, and fostering research and operational partnerships within the geosciences community. Scientific support facilities provide a host of tools and platforms for observing, computing, data access and storage, and scientific visualization, including operation and maintenance of research aircraft, supercomputing, and data systems. Management and general expenses are all costs associated with the overall management of UCAR. 8 (Continued)

11 (m) Donor-Restricted Contributions Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. The contributions are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of activities as net assets released from restrictions. In the absence of donor specification that income and gains on donated funds are restricted, such income and gains are reported as income from unrestricted net assets. (n) Tax Status UCAR and the Foundation are exempt from federal income taxes under Section 501(a) of the Internal Revenue Code (IRC) as organizations described in Section 501(c)(3). However, income generated from activities unrelated to the entities exempt purpose is subject to tax under Section 511 of the IRC. UCAR Child Care LLC is a single-member limited liability company of UCAR and passes any income or loss to UCAR. (o) Recently Issued Accounting Standards Impacts In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) , Revenue from Contracts with Customers, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity also should disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective for UCAR for annual periods in fiscal years beginning after December 15, 2017 (as amended in August 2015 by ASU , Deferral of the Effective Date). UCAR will implement the provisions of ASU as of October 1, UCAR has determined that the new standard has a limited effect on its current policies for revenue recognition. In May 2015, the FASB issued ASU , Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU removes the requirement from U.S. GAAP to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. ASU is effective for UCAR for annual periods in fiscal years beginning after December 15, 2016 and requires retrospective adoption. UCAR has implemented ASU as of September 30, (Continued)

12 In February 2016, the FASB issued ASU , Leases (Topic 842), which supersedes FASB Accounting Standards Codification (ASC) Topic 840, Leases, and makes other conforming amendments to U.S. GAAP. ASU requires, among other changes to the lease accounting guidance, lessees to recognize most leases on balance sheet via a right of use asset and lease liability, and additional qualitative and quantitative disclosures. ASU is effective for UCAR for annual periods in fiscal years beginning after December 15, 2018, permits early adoption, and mandates a modified retrospective transition method. UCAR is required to adopt ASU on October 1, While UCAR expects ASU to add significant right-of-use assets and lease liabilities to the consolidated balance sheets, it is evaluating other effects that the new standard will have on the consolidated financial statements. In August 2016, the FASB issued ASU , Presentation of Financial Statements for Not-For-Profit Entities. ASU is effective for annual reporting periods beginning after December 31, 2017, but early adoption is permitted. The standard makes improvements to the information provided in financial statements and accompanying notes of not-for-profit entities. The amendments set forth the FASB s improvements to net asset classification requirements and the information presented about a not-for-profit entity s liquidity, financial performance, and cash flows. UCAR is currently evaluating the impact of the adoption of this standard will have on its consolidated financial statements. (p) Reclassifications Certain 2016 footnote presentation amounts have been reclassified to conform to the 2017 footnote presentation. These reclassifications had no impact on the consolidated financial statements as previously reported. (q) Subsequent Events UCAR evaluated events subsequent to September 30, 2017 and through January 22, 2018, and there were no significant events subsequent to year-end. (2) Investments (a) Overall Investment Objective The overall investment objective of UCAR is to invest its assets in a prudent manner that will achieve the highest return on investments after inflation that can reasonably be expected given UCAR s practice of taking moderate investment risk according to the norms of not-for-profit organizations. UCAR diversifies its investments among various asset classes incorporating multiple strategies and managers. Major investment decisions are authorized by the Audit and Finance Committee of the UCAR Board, which oversees UCAR s investment program in accordance with established guidelines. (b) Allocation of Investment Strategies In addition to traditional stocks and fixed-income securities, UCAR may also hold shares or units in alternative investment funds involving hedged strategies, private equity, and real asset strategies. Hedged strategies involve funds whose managers have the authority to invest in various asset classes at their discretion, including the ability to invest long and short. Funds with hedged strategies generally hold securities or other financial instruments for which a ready market exists and may include stocks, bonds, put or call options, swaps, currency hedges, and other instruments, and are valued accordingly. Private equity funds employ buyout and venture capital strategies and focus on investments in 10 (Continued)

13 turnaround situations. Private equity and real asset strategies, therefore, often require the estimation of fair values by the fund managers in the absence of readily determinable market values. Because of the inherent uncertainties of valuation, these estimated fair values may differ significantly from values that would have been used had a ready market existed, and the differences could be material. Such valuations are determined by fund managers and generally consider variables such as operating results, comparable earnings multiples, projected cash flows, recent sales prices, and other pertinent information, and may reflect discounts for the illiquid nature of certain investments held. Moreover, the fair values of UCAR s interests in shares or units of these funds, because of liquidity and capital commitment terms that vary depending on the specific fund or partnership agreement, may differ from the fair value of the funds underlying net assets. (c) Basis of Reporting Investments are reported at estimated fair value. If an investment is held directly by UCAR and an active market with quoted prices exists, the market price of an identical security is used as reported fair value. Reported fair values for shares in mutual funds are based on share prices reported by the funds as of the last business day of the fiscal year. UCAR s interests in alternative investment funds are generally reported at the net asset value (NAV) reported by the fund managers, which is used as a practical expedient to estimate the fair value of UCAR s interest therein, unless it is probable that all or a portion of the investment will be sold for an amount different from NAV. As of September 30, 2017 and 2016, UCAR had no plans or intentions to sell investments at amounts different from NAV. UCAR adopted ASU for which fair value is measured using (NAV) per share as a practical expedient and these investments are not categorized as ASC , Fair Value Measurement hierarchy. UCAR s investments are pooled for investment management purposes. UCAR s investments are unrestricted. Investments consist of the following as of September 30: Fair value Corporate investments $ 82,022 79,982 Total $ 82,022 79,982 Certificates of deposit $ 397 1,274 U.S. government securities 16,850 11,944 Equity securities 53,661 52,482 Other fixed-income securities 11,114 14,282 Total $ 82,022 79, (Continued)

14 UCAR s investment income for the years ended comprises the following: Fair value Interest and dividends, net $ 1,813 1,409 Net realized gains 17,432 3,511 Net unrealized gains (losses) (8,419) 2,281 Total $ 10,826 7,201 Investment returns are included in the consolidated statements of activities as follows for the years ended September 30: Investment return: Changes in unrestricted net assets: Investment earnings utilized in operations $ 1 6 Investment return, net of amounts used in operations 10,825 7,187 Changes in temporarily restricted net assets: Investment return 8 $ 10,826 7,201 ASC , Fair Value Measurement, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC are as follows: Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that UCAR has the ability to access at the measurement date. Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active. Level 3 Inputs that are unobservable and supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 12 (Continued)

15 Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. A financial instrument s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes observable requires significant judgment by UCAR. UCAR considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to UCAR s perceived risk of that instrument. In determining the placement of an investment within the hierarchy, UCAR separates UCAR s investment portfolio into two categories: investments and derivative instruments. See note 11 for discussion on derivative instruments. Investments whose values are based on quoted market prices in active markets and are, therefore, classified with Level 1 include equity securities, active listed mutual funds, and certain U.S. government obligations. Investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, dealer quotations, or alternative pricing sources supported by observable inputs, are classified within Level 2. These include certain certificates of deposit and hedge equity funds. As Level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect liquidity and/or nontransferability, which are generally based on available market information. Investments classified within Level 3 have significant unobservable inputs, as they trade infrequently or not at all. Level 3 instruments include certain guaranteed investment contracts, private equity, real estate partnerships, and other fixed-income securities. In accordance with Subtopic , certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the table below are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. 13 (Continued)

16 The following tables represent the fair value of financial instruments carried on the consolidated statements of financial position and by level within the valuation hierarchy as of September 30, 2017 and 2016 (in thousands): Fair Value Measurements at the end of September 30, 2017 Redemption Days Level 1 Level 2 Level 3 Total or liquidation notice Investment strategies: Fixed income: U.S. Treasuries and agencies $ 16,850 16,850 Daily One Corporate notes Daily One Certificates of deposit Maturity One Other fixed income 10,690 10,690 Daily/Quarterly One Total 27, ,361 Domestic equities: Equity index 37,427 37,427 Daily One Small-mid cap 3,536 3,536 Daily One (equity method) Illiquid(1) N/A Total 40, ,126 Global (ex-u.s.) equities: Developed markets 10,745 10,745 Daily One Total 10,745 10,745 Total assets in the fair value hierarchy $ 79, ,232 Investments measured at net asset value 1,790 Illiquid(1) Investments at fair value $ 82,022 (1) Illiquid funds are expected to liquidate within 1 10 years. Unfunded future commitments aggregate $445,720 (note 8). 14 (Continued)

17 Fair Value Measurements at the end of September 30, 2016 Redemption Days Level 1 Level 2 Level 3 Total or liquidation notice Investment strategies: Fixed income: U.S. Treasuries and agencies $ 11,944 11,944 Daily One Corporate notes 4,076 4,076 Daily One Certificates of deposit 1,274 1,274 Maturity One Other fixed income 3,816 6,390 10,206 Daily/Quarterly One Total 19,836 7,664 27,500 Domestic equities: Equity index 11,312 11,312 Daily One Equity income 7,933 7,933 Daily One Large cap value 4,754 4,754 Daily One Small-mid cap 7,681 7,681 Daily One Investment in subsidiaries (equity method) Illiquid(1) N/A Total 31, ,966 Global (ex-u.s.) equities: Developed markets 10,205 10,205 Daily One Total 10,205 10,205 Real assets: U.S. real estate investment trust 4,860 4,860 Daily One Total 4,860 4,860 Total assets in the fair value hierarchy $ 66,581 7, ,531 Investments measured at net asset value 5,451 Illiquid(1) Investments at fair value $ 79,982 (1) Illiquid funds are expected to liquidate within 1 10 years. Unfunded future commitments aggregate $613,000 (note 8). 15 (Continued)

18 The following tables include a rollforward of the amounts for the years ended September 30, 2017 and 2016 for financial instruments classified within Level 3. The classification of a financial instrument within the Level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement (in thousands): Description 2017 Limited investment partnerships Beginning balance at October 1, 2016 $ 286 Total gains, realized/unrealized 77 Purchases 50 Sales, transfers (250) Ending balance at September 30, 2017 $ 163 Description 2016 Limited investment partnerships Beginning balance at October 1, 2015 $ 369 Total gains, realized/unrealized (83) Purchases Sales, transfers Ending balance at September 30, 2016 $ 286 All unrealized and realized gains in the tables above are reflected in the accompanying consolidated statements of activities for the years ended. UCAR paid investment consulting fees of $80,000 for the year ended September 30, No investment management or advisory fees were paid for the years ended September 30, Private equity and venture capital investments are generally made through limited partnerships. Under the terms of such agreements, UCAR may be required to provide additional funding when capital or liquidity calls are made by fund managers. These partnerships have a limited existence, and they may provide for annual extensions for the purpose of disposing portfolio positions and returning capital to investors. However, depending on market conditions, the inability to execute the fund s strategy, or other factors, a manager may extend the terms of a fund beyond its originally anticipated existence or may wind the fund down prematurely. UCAR cannot anticipate such changes because they generally arise from unforeseeable events, but should they occur, they could reduce liquidity or originally anticipated investment returns. Accordingly, the timing and amount of future capital or liquidity calls in any particular future year are uncertain. 16 (Continued)

19 (3) Property Property with title vested in UCAR, including property designated as to a particular purpose, is recorded in the consolidated financial statements. Property with title vested in the U.S. government and other sponsors is not recorded in the consolidated statements of financial position. Purchases of such property, totaling $41,320,000 and $6,254,000 in 2017 and 2016, respectively, are recorded as unrestricted expenses in the consolidated statements of activities. UCAR has the responsibility of maintaining property records and reporting balances to the respective sponsors. In the normal course of business, UCAR disposes of property in accordance with funding agency agreements. Government and other sponsor-owned property at cost consist of the following as of September 30: Real property: NSF titled $ 37,862 35,948 Total real property 37,862 35,948 Equipment: NSF titled 206, ,068 Other sponsors federal 10,169 8,301 Other sponsors nonfederal 3,424 2,203 Total equipment 220, ,572 Total $ 258, ,520 (4) Bonds Payable Bonds payable for the years ended, including unamortized premiums and discounts, are summarized in the following table: Series $ 7,993 16, Series B 3, Series A and B 11,160 12, Series A, B, and C 22, Series 32,695 Subtotal 51,848 55,151 Less current portion 3,748 5,183 Long-term bonds payable $ 48,100 49, (Continued)

20 (a) 2010 Bonds UCAR borrowed $27,485,000 on May 20, 2010 through the issuance of the Colorado Educational and Cultural Facilities Authority Series 2010 (2010 Bonds) to refinance, pay, and cancel an outstanding term note and repay a draw on a line of credit, which financed the cost of acquiring a building, and land, and to refurbish, improve, and equip that building as well as other existing facilities of UCAR, and pay issuance costs. Additionally, proceeds were used to refund the Series 1996A Revenue Bonds and the Series 1999 Development Revenue Bonds. As part of the new Series 2017 Bonds, UCAR legally defeased a portion of the Series 2010 ($6,715,000) maturing on and after September 1, 2022 and recognized a loss of $787,468 on the bond refunding. The maturity date on the remaining portion of the 2010 Bonds is September 1, As of, the outstanding balance of the 2010 Bonds was $7,980,000 and $16,170,000, respectively. The bonds bear interest and mature serially as follows (in thousands): 3.38% maturing September 1, 2018 $ 1, % maturing September 1, , % maturing September 1, , % maturing September 1, , % maturing September 1, % 4.25% thereafter 2,220 Total $ 7,980 The 2010 Bonds maturing on or after September 1, 2020 are subject to optional redemption on or after September 1, 2020, in whole or part on any date, at a redemption price equal to 100% of the principal amount plus any accrued interest. The 2010 Bonds are not collateralized. Certain costs incurred by UCAR in connection with the issuance of these bonds were deferred and are being amortized over the period that the 2010 Bonds are expected to be outstanding. (b) 2012 Bonds Series A On May 10, 2012, UCAR borrowed $7,740,000 from the issuance of the Colorado Educational and Cultural Facilities Authority Series 2012A Convertible Capital Appreciation Revenue Refunding Bonds (2012A Bonds) to establish an escrow fund to refund $1,100,000 of the Series 2002 Bonds and pay interest of $175,000 on September 1, 2012, to refund $6,580,000 of the Series 2003 Bonds on September 1, 2013, and pay semiannual interest of $159,000 at September 1, 2012, March 1, 2013, and September 1, 2013, respectively, and pay issuance costs. The 2012A Bonds converted to a par value of $7,935,000 on March 1, The 2012A Bonds maturity date is September 1, (Continued)

21 As of, the outstanding balance of the 2012A Bonds was $5,620,000 and $6,760,000, respectively. The bonds bear interest and mature serially as follows (in thousands): Maturing September 1, 2018 $ 5.00% maturing September 1, , % maturing September 1, , % maturing September 1, % maturing September 1, , % thereafter 1,235 Total $ 5,620 The 2012A Bonds are not collateralized. Certain costs incurred by UCAR in connection with the issuance of these bonds were deferred and are being amortized over the period that the 2012A Bonds are expected to be outstanding. (c) 2012 Bonds Series B On May 10, 2012, UCAR borrowed $5,565,000 from the issuance of the Colorado Educational and Cultural Facilities Authority Series 2012B Revenue Refunding Bonds (2012B Bonds) to establish an escrow fund to refund $5,890,000 of the Series 2002 Bonds (representing the 2022 to 2033 maturities) and pay issuance costs. On September 1, 2012, these funds were used to refund the 2002 Bonds on their call date. The 2012B Bonds maturity date is September 1, As of, the outstanding balance of the 2012B Bonds was $5,565,000. The bonds bear interest and mature serially as follows (in thousands): Maturing September 1, 2018 $ Maturing September 1, 2019 Maturing September 1, 2020 Maturing September 1, 2021 Maturing September 1, % 5.00% thereafter 5,565 Total $ 5,565 The 2012B Bonds maturing on or after September 1, 2023 are subject to optional redemption on or after September 1, 2022, in whole or part on any date, at a redemption price equal to 100% of the principal amount plus any accrued interest. The 2012B Bonds maturing on September 1 in each of the years 2027, 2030, and 2033 are subject to mandatory sinking fund redemption at a redemption price of 100% of the principal amount redeemed plus interest accrued to the redemption date. The 2012B Bonds are not collateralized. Certain costs incurred by UCAR in connection with the issuance of these bonds were deferred and are being amortized over the period that the 2012B Bonds are expected to be outstanding. 19 (Continued)

22 (d) 2017 Bonds Series UCAR issued Revenue Refunding Bonds, Series 2017 for $33,235,000 on February 8, 2017 through the Colorado Educational and Cultural Facilities Authority at a purchase price of $37,732,166 (representing the total par amount of the Series 2017 Bonds $33,235,000, plus new original issue premium of $2,979,166 and UCAR s contribution of $1,518,000. The funds were used to refund a portion of the Series 2010 Bonds ($7,668,812), Series 2011 ($3,835,186), Series 2013A ($7,684,263) Series 2013B ($15,386,596) which includes a recognized loss of $1,017,000 and payment of termination fees on interest rate swaps ($2,710,000). In addition, issuance costs and discounts on the new refunding were ($297,476) and ($131,876) respectively. As of September 30, 2017, the outstanding balance of the 2017 Bonds was $30,280,000. The bonds bear interest and mature serially as follows (in thousands): 4.00% maturing September 1, 2018 $ 2, % maturing September 1, , % maturing September 1, , % maturing September 1, , % maturing September 1, , % 5.00% thereafter 17,810 Total $ 30,280 (e) Arbitrage Liability The IRC, as amended, requires that cumulative income earned from investing tax-exempt bond proceeds in excess of the related bond interest expense (arbitrage) be rebated to the federal government, generally every five years or upon repayment of the underlying bonds. As of, UCAR has no liability for cumulative arbitrage. 20 (Continued)

23 (f) Unamortized Premium/Discounts and Deferred Bond Charges on Bonds Payable Bonds payable $ 49,445 55,381 Net unamortized premiums/discounts 3, Deferred bond charges (959) (1,025) Total bonds payable plus net unamortized premiums/discounts $ 51,848 55, Bonds payable $ 7,980 16,170 Net unamortized premiums/discounts Deferred bond charges (68) (157) Subtotal 2010 Bonds payable 7,993 16, Bonds payable 3,790 Net unamortized premiums/discounts Deferred bond charges (169) Subtotal 2011 Bonds payable 3, Bonds payable 11,185 12,325 Net unamortized premiums/discounts Deferred bond charges (484) (544) Subtotal 2012 Bonds payable 11,160 12, Bonds payable 23,096 Net unamortized premiums/discounts Deferred bond charges (155) Subtotal 2013 Bonds payable 22, Bonds payable 30,280 Net unamortized premiums/discounts 2,822 Deferred bond charges (407) Subtotal 2017 Bonds payable 32,695 Grand total $ 51,848 55,151 (5) Other Debt UCAR borrowed $615,000 note bearing a variable interest rate of bank prime (4.25% as of September 30, 2017), and the note requires monthly installments of $7,321, plus interest. The new $615,000 note matures on May 15, The respective notes payable outstanding was $234,000 and $322,000 as of, respectively. 21 (Continued)

24 The note matures as follows (in thousands): Fiscal year: 2018 $ Total $ 234 (6) Retirement Contribution Plan UCAR has a defined-contribution plan available to all regular full-time and part-time employees. Participants are required to contribute 5% of regular salary excluding overtime and may contribute an additional amount in accordance with IRC guidelines. UCAR is required to contribute 10% of the participant s annual regular salary. UCAR reserves the right to modify or discontinue the plan at any time. Amounts paid under the plan by UCAR were $11,752,000 and $11,316,000 for the years ended, respectively. (7) Postretirement Benefits UCAR sponsors certain medical and dental benefits for employees and their eligible dependents, who were full-time employees, have worked 15 years, and have retired after age 50. Premiums for medical and dental benefits are paid by the retirees. Such premiums are, however, effectively subsidized by UCAR allowing the retirees to pay company-wide rates, which are derived using actuarial assumptions attributable to both active and retired employees. On September 30, 1998, UCAR amended its retiree medical plan (the Plan). Under the amendment, UCAR may terminate its subsidy of retiree medical premiums. Continuation of the subsidy is primarily contingent on the periodic renewal of the NSF cooperative agreement. Based on UCAR s history of providing these benefits, the postretirement benefit obligation has been calculated assuming the Plan will continue in perpetuity. In May 2008, UCAR management determined that, effective January 1, 2009, retirees age 65 and over are no longer eligible for coverage under UCAR s retiree health insurance plan. This revision to the plan allows Medicare-eligible retirees to purchase private insurance at lower rates than those offered in the current UCAR plans. 22 (Continued)

25 The following table sets forth the components of the accrued postretirement benefit obligation as of September 30, all of which are unfunded based on the amended plan: Accumulated postretirement benefit obligation: Retirees $ Active participants 5,655 6,680 Total $ 6,177 7,033 The following table sets forth the changes related to the postretirement benefit other than net periodic costs: Net actuarial gain $ (1,363) (557) Amortization of prior service cost Recognized net actuarial gain Total $ (198) 1,370 The following table sets forth the items not yet recognized as a component of net periodic postretirement benefit: Net actuarial gain $ (12,241) (11,808) Prior service cost (235) Total $ (12,241) (12,043) 23 (Continued)

26 The following table sets forth the components of UCAR s income for postretirement benefits for the years ended : Service cost of benefits earned $ Interest cost on accumulated postretirement benefit obligation Amortization of prior service credit (235) (980) Recognized net actuarial gain (930) (947) Postretirement benefit income $ (478) (1,239) Benefit payment $ The estimated prior service credit and net gain expected to be amortized into net periodic benefit credit in fiscal year 2017 are $235,000 and $930,000, respectively. UCAR s expected benefit payments are as follows (in thousands): Years ending September 30: 2018 $ ,033 $ 3,072 For the years ended, the postretirement benefit obligation was measured using a 6.69% and 6.75% annual rate of increase in healthcare costs, respectively, decreasing to 4.5% in The weighted average discount rate used in determining the accumulated postretirement benefit obligations is 3.81% and 3.40% as of, respectively. A 1% increase in the assumed healthcare cost trend rate would increase the accumulated postretirement benefit obligation as of September 30, 2017 by $1,555,000 and the aggregate service and interest cost in 2017 by $232,000. A 1.00% decrease in the assumed healthcare cost trend rate would decrease the accumulated postretirement benefit obligation as of September 30, 2017 by $(1,136,000) and the aggregate service and interest cost in 2017 by $(171,000). 24 (Continued)

27 (8) Commitments As a part of its investment portfolio, UCAR has committed to invest in limited investment partnerships. The capital committed and the capital called as of September 30, 2017 are shown in the table below. Inception Capital Capital Uncalled year committed called capital Commonfund Capital Partners 2000, L.P $ 704, ,280 17,720 Commonfund Private Equity VII ,000, , ,000 Commonfund Private Equity V ,000, , ,000 Total investment commitments $ 2,704,000 2,258, ,720 Uncalled capital totaled $445,720 and $613,000, respectively, for 2017 and These investments are in equity securities without readily determinable fair market values. These investments are included in the private equity and venture capital line item disclosed in note 2. UCAR leases property under operating leases. Total rental expense under all operating leases was approximately $612,000 and $350,000, respectively, for 2017 and As of September 30, 2017, UCAR s future minimum rentals under operating leases, which may be terminated by UCAR in the event of insufficient funding, are as follows (in thousands): Year ending September 30: 2018 $ Thereafter 1,514 Total minimum lease payments required $ 2,865 At, UCAR had unfilled purchase order commitments of approximately $64,642,000 and $87,418,000, respectively. UCAR receives financial awards from federal and state agencies in the form of grants, contracts, and cooperative agreements. Expenditures of funds under those programs require compliance with the applicable award and are subject to audit. Any disallowed expenditures resulting from such audits become a liability of UCAR. In the opinion of management, such adjustments, if any, are not expected to materially affect the financial condition or operations of UCAR. 25 (Continued)