COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES MARIETTA, GEORGIA

Transcription

1 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES MARIETTA, GEORGIA CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 2018 AND 2017 AND INDEPENDENT AUDITOR S REVIEW REPORT

2 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONTENTS Independent Auditor s Review Report... 1 Consolidated Balance Sheets... 3 Consolidated Statements of Operations... 5 Consolidated Statements of Comprehensive Income... 6 Consolidated Statements of Changes in Equities... 7 Consolidated Statements of Cash Flows... 8 Notes to Consolidated Financial Statements Supplementary Information... 32

3 MCNAIR, MCLEMORE, MIDDLEBROOKS & CO., LLC CERTIFIED PUBLIC ACCOUNTANTS 389 Mulberry Street Post Office Box One Macon, GA Telephone (478) Facsimile (478) mmmcpa.com The Board of Directors Cobb Electric Membership Corporation April 5, 2018 INDEPENDENT AUDITOR S REVIEW REPORT We have reviewed the accompanying consolidated balance sheets of Cobb Electric Membership Corporation and Subsidiaries (the Corporation) as of January 31, 2018 and 2017 and the related consolidated statements of operations, comprehensive income, changes in equities and cash flows for the nine months then ended, and the related notes to the interim consolidated financial statements. Management s Responsibility The Corporation s management is responsible for the preparation and fair presentation of the interim financial information in accordance with accounting principles generally accepted in the United States of America; this responsibility includes the design, implementation and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with accounting principles generally accepted in the United States of America. Auditor s Responsibility Our responsibility is to conduct our reviews in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information as a whole. Accordingly, we do not express such an opinion. Basis for Modification Based on information furnished to us by management, we believe that the Corporation has not consolidated Gas South, LLC, a wholly-owned subsidiary, in accordance with accounting principles generally accepted in the United States. The Corporation accounts for Gas South, LLC utilizing the equity method for purposes of the interim financial information. See Note 4 for the effect of this departure on total assets, total liabilities, accumulated other comprehensive income and cash and cash equivalents. The results of operations for the nine months ended January 31, 2018 and 2017 are unaffected since the Corporation books the income or loss of Gas South, LLC on a monthly basis

4 Conclusion Based on our reviews, with the exception of the matter described in the Basis for Modification paragraph, we are not aware of any material modifications that should be made to the accompanying interim financial information in order for it to be in conformity with accounting principles generally accepted in the United States of America. Report on Supplementary Information Our report on our reviews of the interim financial information as of and for the nine months ended January 31, 2018 and 2017 was made for the purpose of expressing a conclusion that there are no material modifications that should be made to the interim consolidated financial statements in order to be in conformity with accounting principles generally accepted in the United States of America through performing limited procedures. The information included in pages 32 through 37, which is the responsibility of management, is presented for purposes of additional analysis and is not a required part of the interim consolidated financial statements. The information in the consolidating financial statements, excluding Gas South, LLC, has been subjected to the limited procedures applied in the review of the basic consolidated financial statements, and we are not aware of any material modifications that should be made to such information. The Gas South, LLC information has not been subjected to the limited procedures applied in the review of the basic consolidated financial statements and, accordingly, we do not provide any assurance on it. McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC - 2 -

5 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 31 (UNAUDITED) ASSETS Utility Plant Utility Plant in Service, at Cost $ 915,856,084 $ 896,761,217 Construction Work in Progress 5,175,638 5,372,973 Gross Utility Plant 921,031, ,134,190 Accumulated Provision for Depreciation (299,440,511) (294,443,436) 621,591, ,690,754 Other Property and Investments Investments in Associated Organizations 202,214, ,016,838 Investments in Subsidiary 43,856,640 51,541,342 Notes Receivable 3,349,595 - Nonutility Property 1,876,613 1,876,613 Restricted Funds 7,131,804 6,836,089 Other Investments 2,812,481 2,766, ,241, ,037,485 Intercompany Receivables 233, ,999 Current Assets Cash and Cash Equivalents 4,108,959 6,891,733 Accounts Receivable (Net of Accumulated Provision for Uncollectibles of $710,031 in 2018 and $832,524 in 2017) 23,813,350 22,660,050 Materials and Supplies 4,734,880 4,212,420 Other Current Assets 3,778,217 3,866,824 36,435,406 37,631,027 Other Assets 6,379,014 7,047,781 Total Assets $ 925,880,031 $ 911,626,046 See Accompanying Notes and Independent Auditor s Review Report

6 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 31 (UNAUDITED) EQUITIES AND LIABILITIES Equities Membership Fees $ 475,400 $ 498,050 Patronage Capital - Unrestricted - 13,603,835 Patronage Capital - Restricted 308,783, ,784,014 Donated Capital 271, ,783 Other Equities 51,469,771 30,208,881 Accumulated Other Comprehensive Loss (21,161,556) (24,860,861) 339,838, ,541,702 Long-Term Liabilities Long-Term Debt 369,302, ,418,057 Defined Benefit Pension Plan 85,371,040 90,445,010 Deferred Compensation Plans 7,358,231 8,930, ,031, ,793,611 Current Liabilities Lines-of-Credit 48,200,000 23,700,000 Current Portion of Long-Term Debt 18,889,000 18,286,000 Current Portion of Deferred Compensation Plans 2,000,269 59,838 Accounts Payable 28,218,119 26,493,275 Consumer Deposits 13,196,533 12,969,999 Accrued and Withheld Taxes 2,044,678 5,223,198 Other Current and Accrued Liabilities 5,044,255 7,114, ,592,854 93,846,619 Deferred Credits 6,417,306 16,444,114 Total Equities and Liabilities $ 925,880,031 $ 911,626,046 See Accompanying Notes and Independent Auditor s Review Report

7 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 31 (UNAUDITED) Operating Revenues $ 332,467,399 $ 335,037,446 Operating Expenses Cost of Revenues 227,058, ,291,239 Distribution Operations 7,182,976 6,557,788 Distribution Maintenance 19,847,488 17,512,041 Consumer Accounts 9,570,243 10,045,866 Consumer Service and Information 896,757 1,216,319 Administrative, Selling and General 17,698,625 19,130,574 Depreciation and Amortization 21,383,449 22,471,620 Operating Taxes 2,583,005 2,254,290 Total Operating Expenses 306,221, ,479,737 Operating Margins Before Interest Expense 26,246,129 33,557,709 Interest Expense 16,348,887 16,733,696 Operating Margins After Interest Expense 9,897,242 16,824,013 Nonoperating Margins 4,956,230 9,221,909 Generation and Transmission Patronage Allocations 6,553,000 6,458,078 Other Capital Credits and Patronage Allocations 2,217,887 2,180,230 Net Income $ 23,624,359 $ 34,684,230 See Accompanying Notes and Independent Auditor s Review Report

8 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED JANUARY 31 (UNAUDITED) Net Income $ 23,624,359 $ 34,684,230 Other Comprehensive Income Changes in Fair Value of Costs Related to Cobb Electric Defined Benefit Plans - - Comprehensive Income $ 23,624,359 $ 34,684,230 See Accompanying Notes and Independent Auditor s Review Report

9 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITIES FOR THE NINE MONTHS ENDED JANUARY 31, 2018 AND 2017 (UNAUDITED) Membership Fees Patronage Capital - Unrestricted Patronage Capital - Restricted Donated Capital Other Equities Accumulated Other Comprehensive Loss Total Balance - April 30, 2016 $ 515,175 $ - $ 308,342,206 $ 365,397 $ 9,128,486 $ (24,860,861) $ 293,490,403 Net Income - 13,603, ,080,395-34,684,230 Retirement of Patronage Capital Other Comprehensive Income (Loss) Other (17,125) - 441,808 (57,614) ,069 Balance - January 31, 2017 $ 498,050 $ 13,603,835 $ 308,784,014 $ 307,783 $ 30,208,881 $ (24,860,861) $ 328,541,702 Balance - April 30, 2017 $ 492,980 $ 13,603,835 $ 308,784,014 $ 315,791 $ 27,845,412 $ (21,161,556) $ 329,880,476 Net Income ,624,359-23,624,359 Retirement of Patronage Capital - (13,603,835) (830) (13,604,665) Other Comprehensive Income (Loss) Other (17,580) - - (44,442) - - (62,022) Balance - January 31, 2018 $ 475,400 $ - $ 308,783,184 $ 271,349 $ 51,469,771 $ (21,161,556) $ 339,838,148 See Accompanying Notes and Independent Auditor s Review Report

10 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JANUARY 31 (UNAUDITED) Cash Flows from Operating Activities Net Income $ 23,624,359 $ 34,684,230 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation and Amortization 21,383,449 22,059,354 Loss on Disposition of Property 4,158,487 - ASC 980 Deferred Revenue Transactions - 8,645,023 Equity in Earnings of Gas South, LLC (7,213,524) (7,215,330) Bad Debt Provision 276, ,500 Patronage Capital from Associated Organizations (8,770,438) (8,638,308) Net Periodic Benefit Cost - Defined Benefit Plans 6,188,743 6,372,525 Amortization of Gain on Early Extinguishment of Debt (251,906) (299,570) Defined Benefit Plan Contributions (7,505,001) (6,553,318) Deferred Power Cost - 2,694,290 SERP Contributions - (1,273,264) Change In Accounts Receivable (792,382) (3,449,637) Other Current Assets (1,887,107) (519,251) Other Assets (253,580) 3,589 Accounts Payable 2,051,261 3,546,544 Consumer Deposits 178,401 56,137 Other Current and Accrued Liabilities (8,774,388) 1,796,190 Deferred Credits (196,544) 173,183 22,215,830 52,402,887 Cash Flows from Investing Activities Extension and Replacement of Plant, Net (39,358,681) (34,698,634) Return of Equity from Associated Organizations 2,153,642 2,101,160 Distributions from Gas South, LLC 13,304,000 7,700,000 Principal Received on Notes Receivable 258,405 - Change in Short-Term and Other Investments (46,272) 965,653 (23,688,906) (23,931,821) Balance - Carried Forward $ (1,473,076) $ 28,471,066 See Accompanying Notes and Independent Auditor s Review Report

11 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JANUARY 31 (UNAUDITED) Balance - Brought Forward $ (1,473,076) $ 28,471,066 Cash Flows from Financing Activities Advances of Long-Term Debt 15,000,000 10,000,000 Principal Repayment of Long-Term Debt (14,520,376) (14,868,137) Lines-of-Credit, Net 13,800,000 (22,800,000) Retirement of Patronage Capital (13,604,665) (29,253) Other (62,022) (74,739) 612,937 (27,772,129) Net Increase (Decrease) in Cash and Cash Equivalents (860,139) 698,937 Cash and Cash Equivalents - Beginning 4,969,098 6,192,796 Cash and Cash Equivalents - Ending $ 4,108,959 $ 6,891,733 Supplemental Disclosures of Cash Flow Information Cash Paid for Interest $ 16,289,954 $ 17,035,065 Notes Received on Disposition of Property $ 3,608,000 $ - See Accompanying Notes and Independent Auditor s Review Report

12 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Accounting policies of Cobb Electric Membership Corporation and Subsidiaries (the Corporation) reflect practices appropriate to the electric utility industry and accounting principles generally accepted in the United States (U.S. GAAP). The records of the Corporation are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission. Basis of Presentation These interim consolidated financial statements are unaudited. In the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair statement of the results of operations for the nine months ended January 31, 2018 and 2017, have been included. The results of the nine months ended January 31, 2018 are not necessarily indicative of the results to be expected for the year ended April 30, 2018 due to the fact that the Corporation s revenues can be significantly affected by weather conditions. Nature of Operations The operations of the Corporation are as follows: Cobb Electric Membership Corporation Cobb Electric Membership Corporation (Cobb Electric) is a not-for-profit electric membership corporation whose purpose is to provide electric service to its members located in the Georgia counties of Cobb, Cherokee, Bartow, Fulton and Paulding. The Corporation operates as a cooperative whereby all monies in excess of cost of providing electric service are capital, at the moment of receipt, and are credited to each member s capital account on a calendar year basis. The rates charged by Cobb Electric are determined by the board of directors. Cobb Electric reviews its rates and fees at least annually for recovery of costs. Changes or additional charges are reviewed and approved by the board of directors as needed to account for changes in purchased power throughout the year. Cobb Energy Management Corporation Cobb Energy Management Corporation (CEMC), a wholly-owned subsidiary of Cobb Electric, was incorporated in the state of Georgia on September 3, 1997, to provide various services to Cobb Electric, its subsidiaries and third parties. Effective December 29, 1997, all employees of Cobb Electric were transferred to CEMC. The employees were transferred back to Cobb Electric effective December 26, 2011 and all liabilities related to the employees were transferred to Cobb Electric on that date. In July 2017, the Corporation filed to dissolve Cobb Energy Right-of-Way (CROW), ProCore Staffing, LLC and OLDPCS, LLC (formerly ProCore Solutions, LLC), all wholly-owned subsidiaries of CEMC. The Secretary of State issued Certificates of Termination on July 21, 2017 for CROW and ProCore Staffing, LLC. The Certificate of Termination for OLDPCS, LLC was issued on August 4,

13 (1) Summary of Significant Accounting Policies (Continued) Regulated Operations Due to regulation of its rates by the board of directors, Cobb Electric accounts for certain revenue and expense deferrals in accordance with Accounting Standards Codification (ASC) 980. Accordingly, certain costs and income may be capitalized as a regulatory asset or liability that would otherwise be charged to expense or revenues. Regulatory assets and liabilities are recorded when it is probable that future rates will permit recovery. Consolidation The consolidated financial statements include the accounts and results of operations of the Corporation and its wholly-owned subsidiaries, excluding Gas South, LLC (Gas South) (See Note 4). Intercompany transactions, other than those with Gas South, have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Long-Lived Assets The Corporation evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on either a specific regulatory disallowance or an estimate of undiscounted future cash flows attributable to the assets, as compared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. For the assets identified as held for sale, the carrying value is compared to the estimated fair value less the cost to sell in order to determine if an impairment provision is required. Until the assets are disposed of, their estimated fair value is reevaluated when circumstances or events change. U.S. GAAP requires the present value of the ultimate cost for an asset s future retirement be recorded in the period in which the liability is incurred. The cost should be capitalized as part of the related long-lived asset and depreciated over the asset s useful life. The Corporation has no legal retirement obligations related to its distribution facilities. Therefore, a liability for the removal of these assets will not be recorded. Management believes the actual cost of removal, even though not a legal obligation, will be recovered through rates over the lives of the distribution assets. Utility Plant Electric distribution plant is capitalized at cost less related contributions in aid of construction. In general, electric distribution plant is capitalized at the time it becomes part of an operating unit and has been energized. However, certain items of plant referred to as special equipment items (meters, transformers, oil circuit reclosers, etc.) are capitalized at the time of purchase along with the related estimated cost of installation

14 (1) Summary of Significant Accounting Policies (Continued) Nonutility Property Nonutility property is recorded at cost and is comprised of non-depreciable assets owned by Cobb Electric. Depreciation and Maintenance Depreciation of distribution plant is provided using composite straight-line rates. When property subject to depreciation is retired or otherwise disposed of in the normal course of business, its capitalized cost and its cost of removal less salvage are charged to the accumulated provision for depreciation. Distribution plant is retired using a statistical mortality curve based on prior actual historic retirements based on the vintage of the plant retired. When a retirement of distribution plant occurs, the retirement is assigned the most likely vintage based on computed mortality quantities and the year to date retirements recorded for that vintage. Provision has been made for depreciation of distribution plant at a weighted average straight-line composite rate of 2.92 percent per annum. Depreciation of general plant is provided on a straight-line basis over the estimated useful lives of the various assets. Provision has been made for depreciation of general plant at a weighted average straight-line rate of percent per annum. The costs of maintenance, repairs and replacements of minor items of property are charged to maintenance expense accounts. Asset Impairment The Corporation monitors the recoverability of intangible assets with a finite life and long-lived tangible assets and performs a review of assets or asset groups when circumstances indicate that the carrying amount may not be recoverable. The carrying amount of an asset held and used is not recoverable if it exceeds the undiscounted sum of cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset s carrying value over its fair value. There were no such impairment losses for the nine months ended January 31, 2018 and Cash Equivalents, Short-Term Investments and Other Investments Cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. Short-term investments typically consist of certificates of deposit and other highly liquid debt instruments, which mature in less than one year. Amounts maturing in more than one year are included in other investments

15 (1) Summary of Significant Accounting Policies (Continued) Operating Revenues Electric revenues include patronage capital and are billed monthly to consumers on a cycle basis. Electric rates for the Corporation include provisions to permit the board of directors to adjust billings for fluctuations in fuel costs, purchased power costs and certain other costs. Electricity which had been used by the members of the Corporation but had not been billed to the members was not recorded. The components of this unbilled revenue can fluctuate based on factors including rate structure, weather, period of use, cost of purchased power and other factors. As a result, the overall estimate of unbilled revenues could be significantly affected, which could have a material impact on the Corporation s results of operations if recorded in the consolidated financial statements. Management estimates unbilled revenue to be approximately $22,092,000 and $19,835,000 as of January 31, 2018 and 2017, respectively. The disclosure, but not recording of unbilled revenue, is an industry accepted practice. Billed Accounts Receivable and Credit Policies Billed accounts receivable are stated at the amount management expects to collect. Once an electric customer s service is disconnected and final billed, the associated accounts receivable is written off within 365 days. An allowance is made for doubtful accounts based on experience and other circumstances which may affect the ability of customers to meet their obligations. Accounts considered uncollectible are charged against the allowance. Recoveries of accounts receivable previously written off are recorded against the allowance when received. Receivables are reported on the consolidated balance sheets net of such accumulated allowance. Cost of Revenues Cost of revenues for electricity is expensed as consumed. Investments in Associated Organizations Investments in associated organizations primarily include investments in other cooperative organizations. Investments in other cooperative organizations represent capital investments made primarily to obtain an economical source of supply, financing, product or service. Investments in other cooperative organizations are carried at cost plus allocated equities in accordance with guidance issued in ASC Materials and Supplies Materials and supplies are generally used for construction and for operation and maintenance work, and are not for resale. They are charged to construction or operations at moving average cost, when used. Equities and Margins Cobb Electric is organized and operates under the cooperative form of organization. As such, patronage-sourced margins are allocated to patrons on the basis of patronage. Cobb Electric s bylaws provide that any time prior to dissolution or liquidation, if the board of directors determines that the financial condition of Cobb Electric would not be impaired, patronage capital credited to patrons accounts may be retired in full or in part

16 (1) Summary of Significant Accounting Policies (Continued) Equities and Margins (Continued) Cobb Electric s bylaws currently require patronage-sourced income to be calculated on a tax basis. Cobb Electric allocated patronage-sourced income to its members through December 31, Cobb Electric had tax basis losses for the years ended December 31, 2015, 2014 and 2013 and accordingly had no capital credits to assign for those years. Cobb Electric assigned $13,603,835 to its members for the tax year ended December 31, This amount is presented as unrestricted patronage capital on the consolidated balance sheets as of January 31, Patronage capital assigned through December 31, 2012 was included in the Class Action Settlement (See Note 15), and is therefore presented as restricted in the consolidated balance sheets, since the settlement contains specific provisions regarding patronage capital assigned for the years ended December 31, 2012 and prior. Under provisions of the long-term debt agreements, the return to patrons of capital contributed by them is limited unless Cobb Electric s total equity (as defined by the loan agreements) is equal to or greater than 20 percent of its total assets (as defined by the loan agreements) after giving effect to the distribution. The equity to assets ratio was approximately 37 percent as of January 31, Other equities are not allocated and are retained by Cobb Electric. Since Cobb Electric assigns patronage capital on a tax basis, a component of other equities is related to timing differences between book basis income and tax basis income which may reverse in a future period and could be allocated as patronage capital. Comprehensive Income (Loss) The objective of comprehensive income (loss) is to report a measure of all changes in equity of the entity that result from transactions and other economic events of the period other than transactions with owners. Comprehensive income consists of actuarial losses and other costs not yet recognized as a component of income related to Cobb Electric s retirement plans. The amount of accumulated other comprehensive income the Corporation estimates that it will amortize to pension cost in the year ending January 31, 2018 is dependent on the results of the April 30, 2018 actuarial studies, and an estimate is not determinable. Income Taxes Cobb Electric is exempt from federal and state income taxes under Section 501(c)(12) of the Internal Revenue Code (IRC) which provides, in part, that the Corporation derive at least 85 percent of its annual gross income from members to retain the exemption. The Corporation expects to meet the requirement for the year ended December 31, As a tax-exempt rural electric cooperative, Cobb Electric is precluded from filing a consolidated tax return with any subsidiary organizations. Gas South and CEMC (taxable subsidiaries) file separate corporate tax returns for their respective tax years. The Corporation s taxable subsidiaries account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date

17 (1) Summary of Significant Accounting Policies (Continued) Income Taxes (Continued) The Corporation records interest and penalties related to federal and state income tax returns as a component of interest expense and nonoperating margins, respectively. No interest or penalties are included in the consolidated statements of operations for the nine months ended January 31, 2018 and CEMC has federal net operating losses which will carry forward to future years. The ability to utilize the losses is uncertain and the amount is immaterial to the consolidated financial statements. Restricted Funds Restricted funds represent funds designated for specific purposes under the control of third parties or funds for which a specific purpose has been designated, and are therefore segregated from cash and cash equivalents, short-term or other investments. New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board released Accounting Standards Update (ASU) , Revenue from Contracts with Customers. ASU is designed to create greater comparability for financial statement users across industries and jurisdictions through a more principlesbased approach than companies in the United States are used to following. The standard would require companies to recognize revenue through a five-step process: (1) identify the contract with the customer, (2) identify the separate performance obligations in the contract, (3) determine the transaction type, (4) allocate the transaction price to the separate performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU deferred the effective dates for nonpublic companies to reporting periods beginning after December 15, 2018, and for interim periods within annual reporting periods beginning after December 15, The standard will require the Corporation to accrue unbilled electric revenue with retrospective application and will require a change in accounting principle in the period adopted. Based on management s assessment, the standard will not have any other material impact on the Corporation s consolidated financial statements. Presentation of Sales Tax Certain portions of the Corporation s sales are subject to sales tax imposed by tax jurisdictions. When required, the Corporation collects sales tax from customers and remits it to the applicable jurisdiction. The Corporation s accounting policy is to exclude the tax collected and remitted from revenues and cost of sales. Reclassifications Certain reclassifications have been made to the 2017 consolidated financial statements to conform to the 2018 consolidated financial statement presentation. These reclassifications had no effect on net income for the nine months ended January 31,

18 (1) Summary of Significant Accounting Policies (Continued) Subsequent Events In preparing these consolidated financial statements, the Corporation evaluated events and transactions for potential recognition or disclosure through April 5, 2018, the date the consolidated financial statements were available to be issued. (2) Utility Plant Listed below are the major classes of the utility plant as of January 31: Distribution Plant $ 757,112,616 $ 732,160,502 General Plant 158,743, ,600,715 Electric Plant in Service 915,856, ,761,217 Construction Work in Progress 5,175,638 5,372,973 $ 921,031,722 $ 902,134,190 (3) Investments in Associated Organizations Investments in associated organizations consisted of the following as of January 31: Oglethorpe Power Corporation Capital Credits $ 113,111,627 $ 108,052,549 National Rural Utilities Cooperative Finance Corporation (NRUCFC) Capital Term Certificates 29,714,971 30,685,422 Capital Credits 16,350,927 15,323,298 Georgia Transmission Corporation Contributed Capital 5,800,309 5,800,309 Capital Credits 26,657,684 25,177,749 Smarr EMC Contributed Capital 721, ,154 Capital Credits 6,578,314 6,578,314 CoBank Capital Credits 1,212,999 1,591,571 Other 2,066,150 2,086,472 $ 202,214,135 $ 196,016,

19 (4) Investments in Subsidiary Gas South, a wholly-owned subsidiary of Cobb Electric, is a retail energy marketer that serves residential, governmental and institutional customers throughout the southeast in areas where customers have the ability to choose their energy provider. Gas South is a certified natural gas marketer in the state of Georgia and competes to serve customers who are connected to the Local Distribution Company (LDC), Atlanta Gas Light (AGL). Gas South purchases natural gas from wholesale suppliers for delivery to the citygate where AGL assumes responsibility and liability associated with the delivery of natural gas to Gas South s customers. Gas South also serves commercial and industrial customers in the state of Florida through several other LDCs. Gas South is registered to serve large commercial and industrial customers in portions of North Carolina, South Carolina and Virginia through other LDCs. Gas South may also serve large customers that are connected directly to interstate pipelines. U.S. GAAP requires corporations to consolidate wholly-owned subsidiaries in their financial statements. Gas South has been accounted for using the equity method in the consolidated financial statements, whereby the investment is carried at cost and adjusted for the Corporation s proportionate share of undistributed earnings or losses. Earnings from Gas South are included as a component of nonoperating margins in the consolidated statements of operations (See Note 12). The following table summarizes financial data had Gas South been consolidated with its parent organization as of January 31, 2018 and 2017: 2018 As Stated Difference Consolidated Total Assets $ 925,880,031 $ 62,786,608 $ 988,666,639 Total Liabilities $ 586,041,883 $ 62,243,338 $ 648,285,221 Accumulated Other Comprehensive Loss $ (21,161,556) $ 543,270 $ (20,618,286) Cash and Cash Equivalents $ 4,108,959 $ 1,107,921 $ 5,216, Total Assets $ 911,626,046 $ 35,094,715 $ 946,720,761 Total Liabilities $ 583,084,344 $ 32,747,223 $ 615,831,567 Accumulated Other Comprehensive Loss $ (24,860,861) $ 2,347,492 $ (22,513,369) Cash and Cash Equivalents $ 6,891,733 $ 4,192,531 $ 11,084,

20 (5) Restricted Funds Restricted funds consisted of the following as of January 31: Cash Surrender Value of Life Insurance (See Note 10) $ 4,721,227 $ 4,649,887 Deferred Compensation Assets (See Note 10) 2,331,275 2,097,230 Self Insurance Cash Account Maintained by Claims Administrator 79,302 88,972 $ 7,131,804 $ 6,836,089 Cash surrender value (CSV) of life insurance represents the surrender value of whole life insurance policies which are to be used to fund the Executive Death Benefit Agreements with certain current and former key executives of Cobb Electric and Cobb Energy. Deferred compensation assets represent amounts which have been funded for the Corporation s nonqualified deferred compensation plans (NQDC Plans). (6) Other Investments Other investments consisted of the following as of January 31: NRUCFC Member Capital Securities $ 2,000,000 $ 2,000,000 Convertible Corporate Debt Instruments 812, ,603 $ 2,812,481 $ 2,766,

21 (7) Notes Receivable The Corporation sold real estate in August and December 2017 to a local nonprofit corporation. In consideration, the Corporation received notes totaling $3,608,000. A summary of the notes receivable is as follows: Due from MUST Ministries in Monthly Installments of $5,201 Through October 31, 2047, Including Interest at 2.07 Percent, Secured by Real Estate $ 1,385,595 $ - Due from MUST Ministries in Annual Principal Payments of $250,000 on Each of December 31, 2018, 2019 and 2020, Interest Rate of 1.33 Percent, Interest Due January 15, 2019, 2020 and 2021, All Unpaid Principal and Interest Due December 31, 2021, Secured by Real Estate 1,964,000 - $ 3,349,595 $ - (8) Other Assets The following deferred debits and intangibles are included in other assets on the consolidated balance sheets as of January 31: Sponsorship Naming Rights (Net of Accumulated Amortization of $6,598,500 in 2018 and $5,962,500 in 2017) $ 6,121,500 $ 6,757,500 Other 257, ,281 Sponsorship Naming Rights $ 6,379,014 $ 7,047,781 On January 25, 2005, CEMC entered into a naming rights sponsorship agreement with the Cobb Marietta Coliseum and Exhibit Hall Authority. Under this agreement, CEMC obtained naming rights for a new performing arts centre, officially known as the Cobb Energy Centre for the Performing Arts (the Centre). Under the agreement, CEMC paid $12,720,000 for the naming rights of the Centre through September 2027 and continues to amortize the cost into income on a straight-line basis over the 20-year term of the agreement. Amortization expense of $318,000 is included in the consolidated statements of operations for the nine months ended January 31, 2018 and

22 (8) Other Assets (Continued) Future amortization related to other assets which are subject to amortization is expected to be as follows for years ending January 31: Year Amount 2019 $ 893, , , , ,000 Thereafter 2,941,500 $ 6,379,014 (9) Debt Long-Term Debt Long-term debt consists of mortgage notes payable to NRUCFC. The notes are secured by a mortgage agreement between the Corporation and NRUCFC. Substantially all the assets of the Corporation, excluding those of Gas South, are pledged as security for long-term debt. The notes generally have initial maturity periods of 30 years and are payable on an installment basis. The notes have provisions for interest rate repricing based on the expiration of the fixed rate term for each advance. The notes contain certain affirmative and negative covenants, including maintenance of certain financial ratios as defined in the agreement. The notes have maturity periods varying from April 22, 2018 to July 7, 2051 and are payable on an installment basis. Long-term debt is comprised of the following as of January 31: Weighted Average Interest Rate NRUCFC Mortgage Notes 5.38% $ 388,191,452 $ 391,704,057 Maturities Due Within One Year (18,889,000) (18,286,000) $ 369,302,452 $ 373,418,

23 (9) Debt (Continued) Long-Term Debt (Continued) Principal maturities of long-term debt for each of the next five years are estimated as follows: Year Amount 2019 $ 18,889, ,643, ,378, ,074, ,671,400 Thereafter 286,534,652 $ 388,191,452 The Corporation has unadvanced loan funds totaling $39,541,000 on commitment from NRUCFC. The availability of the funds is contingent on the Corporation s compliance with one or more preconditions set forth in the mortgage agreement. Revolving Credit Facilities Available lines-of-credit consisted of the following as of January 31: Lender Total Revolving Credit Facility at Outstanding Balance Borrower January 31, 2018 Bank of America Cobb Electric $ 30,000,000 $ 22,900,000 $ 11,400,000 CoBank Cobb Electric 50,000,000 25,300,000 12,300,000 $ 80,000,000 $ 48,200,000 $ 23,700,000 Cobb Electric s $30,000,000 unsecured revolving credit facility with Bank of America bears interest at the LIBOR Daily Floating Rate plus 1.20 percent (2.773 percent as of January 31, 2018). Cobb Electric s $50,000,000 unsecured revolving credit facility with CoBank, ACB (CoBank) bears interest at CoBank s weekly quoted variable rate, which is a rate per annum equal at all times to the rate of interest established by CoBank on the first business day of each week (3.03 percent as of January 31, 2018). Both the Bank of America and the CoBank revolving credit facilities contain the following financial covenants: minimum debt service coverage, minimum equity to assets ratio and asset coverage testing. These covenants are tested at each fiscal year quarter-end, on a rolling twelve months basis

24 (10) Retirement Benefits Defined Benefit Pension Plan Cobb Electric has a defined benefit pension plan which provides a minimum pension benefit that is determined by an eligible participant s years of service, final average compensation and the value of the Corporation s contributions. On December 18, 2012, the board of directors froze participation in the pension plan for employees hired after December 31, Those employees are eligible for an employer retirement contribution as part of the employee savings plan. The status of the Corporation s pension plan as of January 31 is detailed as follows: Projected Benefit Obligation - April 30, 2017 and 2016 $ 169,949,635 $ 162,977,194 Service Cost 8,606,363 6,528,256 Interest Cost 6,983,597 5,246,584 Benefits Paid (14,582,536) (2,839,689) Projected Benefit Obligation - January 31, 2018 and ,957, ,912,345 Fair Value of Plan Assets - April 30, 2017 and ,011,594 72,248,866 Contributions 7,505,001 6,553,318 Benefits Paid (14,582,536) (2,839,689) Actual Return on Plan Assets 9,651,960 5,504,840 Fair Value of Plan Assets - January 31, 2018 and ,586,019 81,467,335 Funded Status - Over (Under) $ (85,371,040) $ (90,445,010) Cobb Electric s net periodic benefit cost and projected benefit obligation are calculated using various actuarial assumptions and methodologies. These assumptions include discount rates, expected return on plan assets, rate of compensation increases, mortality rates and other factors. Management reviews actuarial assumptions on an annual basis (April 30) in conjunction with the annual independent valuation of Cobb Electric s pension obligation. Weighted average assumptions utilized in the April 30 valuation of the Corporation s pension liability are as follows: Discount Rate on Net Periodic Benefit Cost 3.33% 4.10% Discount Rate on Projected Benefit Obligation 3.61% 3.33% Rate of Compensation Increase 3.75% 3.75% Expected Return on Plan Assets 8.00% 8.00% Cost of Living Increase (Postretirement) 1.50% 1.50%

25 (10) Retirement Benefits (Continued) Defined Benefit Pension Plan (Continued) Net periodic benefit cost consisted of the following for the nine months ended January 31: Service Cost $ 8,606,363 $ 6,528,256 Interest Cost 6,983,597 5,246,584 Actual Return on Plan Assets (9,651,960) (5,504,840) $ 5,938,000 $ 6,270,000 As of January 31, 2018, plan assets were comprised as follows: 61 percent equity funds, 38 percent bond funds and 1 percent cash and money market funds. The current asset allocation adheres to the Corporation s overall investment strategy for plan assets. The expected rate of return on plan assets is determined by those assets historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class. The Corporation expects to contribute approximately $12,000,000 to the pension plan in the ensuing twelve months. Based on the April 30, 2017 actuarial study, the Corporation s expected benefit payments under the plan for the fiscal years ended April 30 are as follows: Year Amount 2019 $ 6,905, ,247, ,926, ,528, ,783, ,129,524 Since the fair value of pension plan assets exceeds the actuarial present value of expected benefit payments due in the ensuing twelve months, the net pension obligation is included as a long-term liability on the consolidated balance sheets. IRS Funding Target The plan s funding target attainment percentage (AFTAP) is a measure of how well the plan is funded on a particular date. The percentage for a plan year is obtained by dividing the plan s net plan assets by the IRS funding target, both as of the valuation date. In general, the higher the percentage, the better funded the plan. Significant benefit restrictions apply if the AFTAP drops below 80%

26 (10) Retirement Benefits (Continued) Defined Benefit Pension Plan (Continued) The plan s funding target attainment percentage, as determined by the plan actuary, for the most recent four plan years is shown below, with the most recent calculation at 91.27% as compared to substantially lower values 2 of the 3 prior years. Also shown are Cobb Electric s pension contributions for the most recent four plan years. Plan Year Plan Assets $ 39,781,944 $ 59,288,030 $ 76,882,216 $ 82,751,340 IRS Funding Target $ 68,836,667 $ 74,105,270 $ 79,677,896 $ 90,663,109 Funding Percentage 57.79% 80.01% 96.49% 91.27% Company Contributions $ 30,933,000 $ 20,442,805 $ 8,741,157 $ 8,338,288 Employee Savings Plans The Corporation s employee savings plan qualifies as a deferred salary arrangement under IRC Section 401(k). Under the plan, participating employees may defer a portion of their pretax earnings up to the Internal Revenue Service annual contribution limit. On December 18, 2012, the board of directors amended the employee savings plan to provide an employer contribution for eligible hires frozen from the Corporation s defined benefit pension plan. The Corporation s contributory portion of costs related to the employee savings plan totaled approximately $417,205 and $436,007 for the nine months ended January 31, 2018 and 2017, respectively. Deferred Compensation Plans Cobb Electric has a NQDC arrangement with a select group of Cobb Electric management and highly compensated employees. Cobb Electric made matching contributions of approximately $48,926 and $52,608 for the nine months ended January 31, 2018 and 2017, respectively. The assets of this NQDC plan are assets of Cobb Electric and are included in the consolidated balance sheets as restricted funds. Distributions for the nine months ended January 31, 2018 and 2017 were $4,688 and $4,681, respectively. Assets set aside for these plans totaled $2,331,258 as of January 31, These assets are subject to the claims of Cobb Electric s general creditors. A corresponding long-term liability is included in the consolidated balance sheets as a component of deferred compensation

27 (10) Retirement Benefits (Continued) Deferred Compensation Plans (Continued) Cobb Electric s Supplemental Executive Retirement Plan (SERP) is a NQDC plan that benefits certain designated Cobb Electric employees who are within a select group of key management or highly compensated employees. The status of the Cobb Electric SERP as of January 31 is detailed as follows: Projected Benefit Obligation - April 30, 2017 and 2016 $ 1,962,864 $ 3,011,986 Service Cost 65,114 63,008 Interest Cost 41,939 39,517 Benefits Paid (69,648) (1,273,264) Projected Benefit Obligation - January 31, 2018 and ,000,269 1,841,247 Fair Value of Plan Assets - April 30, 2017 and Employer Contributions 69,648 1,273,264 Benefits Paid (69,648) (1,273,264) Fair Value of Plan Assets - January 31, 2018 and Funded Status - Over (Under) $ (2,000,269) $ (1,841,247) The purpose of the SERP is to retain and reward long-term service personnel, attract and retain management employees and to rectify the effect of limitations imposed by IRC Sections 415 and 401(a)(17). The SERP contains certain vesting provisions which the employee must meet in order to receive the benefits. Pursuant to a resolution adopted by the board of directors on October 24, 2017, benefits under the SERP were frozen as of that date. In addition, some participants forfeited their benefits through voluntary separation prior to their normal retirement date and the final benefit payout for the remaining participant has not been finalized. Any gains or losses resulting from these forfeitures and the final plan payout will be reflected in the April 30, 2018 audited financial statements. Once the final payout is determined and paid, there will be no additional contributions to the plan nor any future obligation. Deferred compensation related to the SERP is recognized on the consolidated balance sheets as a component of deferred compensation liabilities as of January 31: Current Liabilities $ 2,000,269 $ 59,838 Long-Term Liabilities - 1,781,409 $ 2,000,269 $ 1,841,

28 (10) Retirement Benefits (Continued) Deferred Compensation Plans (Continued) The SERP s net periodic benefit cost and projected benefit obligation are calculated using various actuarial assumptions and methodologies. These assumptions include discount rates, rate of compensation increases and other factors. It is also assumed that plan participants will all reach the vesting criteria described in the plan. Actuarial assumptions are reviewed on an annual basis. The Corporation obtains an independent valuation of its SERP obligation at April 30 of each year. Assumptions used in the valuations are utilized to accrue postretirement benefit costs for the next fiscal year. Weighted average assumptions utilized in the April 30 valuation of the Corporation s SERP liability are as follows: Discount Rate on Net Periodic Benefit Cost 2.64% 2.83% Discount Rate on Projected Benefit Obligation 2.98% 2.64% Rate of Compensation Increase 3.75% 3.75% Net periodic benefit cost for the SERP consisted of the following for the nine months ended January 31: Service Cost $ 65,114 $ 63,008 Interest Cost 41,939 39,517 Postretirement Healthcare Plans Pre-1991 Employees $ 107,053 $ 102,525 The Corporation has set aside assets in an irrevocable trust (the Pre-1991 Trust) to provide certain postretirement medical and life insurance benefits to eligible participants who were hired prior to September 1, 1991 and have twelve years of service and attain age 55 while employed by Cobb Electric or Cobb Energy. The primary benefits provided under the plan are the same as the medical insurance benefits provided for current Cobb Electric employees. The plan is considered a pre-funded defined contribution plan. As a result, the board of directors has the authority to change benefit levels and plan provisions to utilize existing Pre-1991 Trust assets. Pre-1991 Trust assets totaled $19,156,354 as of January 31, In addition, Cobb Electric has advanced $1,953,649 to be reimbursed by the Pre-1991 Trust. The plan will terminate when Pre-1991 Trust assets are exhausted. Accordingly, there is no assurance those eligible to receive benefits will receive the benefits currently being provided by the plan. Based on an April 30, 2017 asset sufficiency analysis, assuming an eight percent annual return on assets, historical claims data and other demographic assumptions, Cobb Electric s independent actuaries have estimated the Pre-1991 Trust assets will be fully depleted in If the annual return on assets was reduced to 4 percent, the trust assets would be fully depleted in