REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS THE INTERMOUNTAIN RURAL ELECTRIC ASSOCIATION

Transcription

1 REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS THE INTERMOUNTAIN RURAL ELECTRIC ASSOCIATION December 31, 2017 and 2016

2 Table of Contents Board of Directors and CEO 1 Report of Independent Auditors 2 3 PAGE Financial Statements Balance sheets 4 5 Statements of operations and comprehensive income (loss) 6 Statements of equities and margins 7 Statements of cash flows 8 9 Notes to financial statements 10 22

3 BOARD OF DIRECTORS AND CEO NAME TITLE ADDRESS Timothy L. White President Castle Rock, Colorado Bruff Shea Vice President Franktown, Colorado James C. Dozier Secretary-Treasurer Bailey, Colorado James Anest Assistant Secretary-Treasurer Parker, Colorado Robert Graf Director Centennial, Colorado Michael Kempe Director Littleton, Colorado Gene Sperry Director Woodland Park, Colorado Patrick Mooney Chief Executive Officer Denver, Colorado 1

4 Report of Independent Auditors To the Board of Directors The Intermountain Rural Electric Association Report on Financial Statements We have audited the accompanying financial statements of the Intermountain Rural Electric Association (the Association) which comprise the balance sheets as of December 31, 2017 and 2016, and the related statements of operations and comprehensive income (loss), equities and margins, and cash flow for the year ended December 31, 2017, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 2

5 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Intermountain Rural Electric Association as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the year ended December 31, 2017, in accordance with accounting principles generally accepted in the United States of America. Disclaimer of Opinion on Statement of Operations, Comprehensive Income, Equities and Margins, and Cash Flows for the year ended December 31, 2016 Because we were not engaged to audit the statement of operations, comprehensive income, equities and margins, and cash flows, we did not extend our auditing procedures to enable us to express an opinion on results of operations and cash flows for the year ended December 31, Accordingly, we express no opinion on the results of operations and cash flows for the year ended December 31, Portland, Oregon April 19,

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7 Balance Sheets ASSETS December 31, ELECTRIC PLANT Plant in service $ 1,297,352,795 $ 1,246,805,112 Less accumulated depreciation (314,362,040) (287,333,033) Net plant in service 982,990, ,472,079 Construction work in progress 28,583,118 41,960,799 Net utility plant 1,011,573,873 1,001,432,878 INVESTMENTS AND OTHER ASSETS 25,878,027 24,766,203 CURRENT ASSETS Cash and cash equivalents 2,497,924 2,900,207 Receivables (less provision for uncollectible accounts of $476,661 and $195,039 in 2017 and 2016, respectively) 11,720,238 17,406,336 Unbilled revenue 17,958,478 18,228,076 Materials and supplies 6,257,248 4,411,598 Prepayments and other current assets 2,251,904 2,472,568 Total current assets 40,685,792 45,418,785 DEFERRED DEBITS 12,644,949 12,127,565 Total assets $ 1,090,782,641 $ 1,083,745,431 4 See accompanying notes.

8 Balance Sheets LIABILITIES AND CAPITAL December 31, CAPITAL EQUITIES Memberships $ 690,245 $ 677,635 Patronage capital 302,337, ,417,654 Other equities 12,302,622 10,300,387 Other comprehensive loss (2,260,928) (930,091) Total 313,069, ,465,585 LONG-TERM LIABILITIES 674,416, ,171,512 OTHER LONG-TERM OBLIGATIONS 17,309,787 15,366,740 CURRENT LIABILITIES Current maturities of long-term debt 21,674,580 18,625,236 Current advance on line of credit 17,000,000 11,000,000 Accounts payable 19,047,395 19,768,488 Accrued expenses 5,402,983 5,114,945 Accrued taxes 14,115,399 14,367,751 Customer deposits 2,837,606 2,570,261 Total 80,077,963 71,446,681 DEFERRED LIABILITIES 5,908,822 8,294,913 COMMITMENTS AND CONTINGENCIES (NOTE 10) Total liabilities and capital $ 1,090,782,641 $ 1,083,745,431 See accompanying notes. 5

9 Statements of Operations and Comprehensive Income (Loss) Years Ended December 31, (Unaudited) OPERATING REVENUE Electric energy revenue $ 277,573,440 $ 283,793,508 Miscellaneous electric revenue 2,721,683 2,882,317 Total operating revenue 280,295, ,675,825 OPERATING EXPENSES Cost of power purchased 82,377,801 89,247,657 Power production expense 28,468,057 30,962,909 Maintenance of transmission plant 1,335,486 1,276,333 Operating expenses distribution 6,462,745 5,690,838 Maintenance of distribution plant 11,974,645 12,618,750 Accounting and collection expenses 7,378,081 7,471,773 Other customer expenses 659, ,742 Administrative and general 15,563,688 13,627,815 Depreciation 37,734,662 33,963,267 Regulatory liability expense 3,093,950 3,815,217 Taxes 12,262,518 11,767,665 Total operating expenses 207,311, ,989,966 ELECTRIC OPERATING MARGIN 72,983,848 75,685,859 INTEREST ON LONG-TERM DEBT 41,316,240 42,408,113 OPERATING MARGIN BEFORE CAPITAL CREDITS 31,667,608 33,277,746 CAPITAL CREDITS 3,892,659 3,961,963 OPERATING MARGIN 35,560,267 37,239,709 NON-OPERATING MARGINS (DEFICITS) Interest revenue 511, ,455 Other expense (1,898,832) (541,338) Total non-operating margins (deficits) (1,387,230) (123,883) NET MARGIN 34,173,037 37,115,826 COMPREHENSIVE INCOME (LOSS) (1,330,837) 5,985,860 COMPREHENSIVE INCOME $ 32,842,200 $ 43,101,686 6 See accompanying notes.

10 Statements of Equities and Margins Years Ended December 31, (Unaudited) Memberships Balance at January 1, $ 677,635 $ 665,040 Additions 12,610 12,595 Balance at December 31, 690, ,635 Patronage capital Balance at January 1, 283,417, ,040,557 Transfer of net margins 34,173,037 37,115,826 Retirement of capital credits, net (15,253,265) (13,738,729) Balance at December 31, 302,337, ,417,654 Other equity Balance at January 1, 10,300,387 8,878,296 Additions 2,002,235 1,422,091 Balance at December 31, 12,302,622 10,300,387 Other comprehensive loss Balance at January 1, (930,091) (6,915,951) Unrealized gain on investments 14,982 10,970 Unrealized gain (loss) on pension benefits (267,795) 1,252,555 Unrealized gain (loss) on post-retirement benefits (1,078,024) 4,722,335 Balance at December 31, (2,260,928) (930,091) Total equities and margins $ 313,069,365 $ 293,465,585 See accompanying notes. 7

11 Statements of Cash Flows Years Ended December 31, (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net margin $ 34,173,037 $ 37,115,826 Adjustments to reconcile net margin to net cash provided by operating activities: Depreciation 37,734,662 33,963,267 Depreciation charged to clearing 514, ,384 Amortization of refinance fee 893, ,319 Accretion of asset retirement obligation 287, ,798 Patronage capital credits assigned by associated organizations (3,892,659) (3,961,963) Change in assets and liabilities: Receivables, net 5,686,098 (2,290,816) Unbilled revenue 269, ,871 Prepayments and other current assets 220,664 (89,408) Other deferred debits (517,384) 2,752,593 Accounts payable (721,093) 1,304,021 Accrued liabilities 35,686 (141,487) Customer deposits 267, Other deferred liabilities (1,562,477) 1,964,961 Pension benefits (208,194) (5,000) Post-retirement benefits 518, ,573 Net cash provided by operating activities 73,698,792 72,803,384 CASH FLOWS FROM INVESTING ACTIVITIES Investment in plant, net (48,390,579) (57,044,079) Decrease (increase) in materials and supplies (1,845,650) 303,143 Decrease in nonutility property 10,305 10,305 Increase in marketable securities (3,225) (3,026) Capital credits redeemed 2,588,737 2,636,574 Maturities of subordinate certificates 200,000 - Net cash used in investing activities (47,440,412) (54,097,083) 8 See accompanying notes.

12 Statements of Cash Flows Years Ended December 31, (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES Principal borrowings on long-term debt $ - $ 15,000,000 Payments on long-term debt (18,598,629) (15,337,119) Payments on debt refinance fee - (13,741,994) Line of credit borrowings 6,000,000 6,000,000 Capital refunds to members (13,305,413) (12,324,595) Customer advances for construction, net (823,614) (701,309) Increase in other capital 66,993 20,552 Net cash used in financing activities (26,660,663) (21,084,465) NET DECREASE IN CASH AND CASH EQUIVALENTS (402,283) (2,378,164) CASH AND CASH EQUIVALENTS beginning of year 2,900,207 5,278,371 CASH AND CASH EQUIVALENTS end of year $ 2,497,924 $ 2,900,207 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest $ 41,774,597 $ 42,727,636 Cash paid during the year for property taxes, net of refunds $ 12,591,516 $ 12,383,132 See accompanying notes. 9

13 Notes to Financial Statements Note 1 Nature of Organization and Operations The Intermountain Rural Electric Association (the Association or IREA) is a Colorado cooperative engaged in the generation, transmission and distribution of electric energy to approximately 155,000 services in a 5,000 square mile service territory which includes portions of ten counties surrounding the Denver metropolitan area. The Association s headquarters is located in Sedalia, Colorado. IREA owns 25 1/3% of a supercritical, pulverized coal-fired generating plant, Comanche III, located in Pueblo, Colorado. The plant is operated by Xcel Energy. Comanche III achieved commercial operation on July 6, The plant was designed to produce 750 megawatts (MW) and is rated at or above that level. The association pays its proportionate share of operating, maintenance and capital expenditures and is entitled to its share of the plant s generation. In addition, IREA purchases wholesale power under long-term agreements with Public Service Company of Colorado (PSCo) and the Western Area Power Administration. IREA also purchases all of the output of a MW photovoltaic array, known as Victory Solar, located within its service territory. Victory Solar was designed to produce no less than 11 MW AC and no more than 13.2 MW AC. The Association owns and operates miles of 115kV transmission and 70 miles of 44kV transmission lines. During the year ended December 31, 2017, the Association changed their reporting from a March 31 fiscal year end to a calendar year end. Note 2 Summary of Significant Accounting Policies Basis of accounting and presentation The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America as applied to regulated enterprises, which conform to policies prescribed by the Federal Energy Regulatory Commission (FERC) Uniform System of Accounts Electric. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 980, Regulated Operations, the Cooperative records certain assets and liabilities in accordance with the economic effects of the rate making process. Electric plant and depreciation Electric plant assets are stated at cost (see Note 3). Cost includes contracted services, direct labor and materials, interest capitalized during construction on the generation assets, and indirect charges. Contributions in aid of construction are credited to the applicable plant accounts. The provision for depreciation is determined by the straight-line method over estimated useful asset lives (as specified by FERC for electric plant) ranging from four to fifty-three years. Maintenance and repairs, including the renewal of minor items of plant not comprising a retirement unit, are charged to the appropriate maintenance accounts, except that repairs of transportation and service equipment are charged to clearing accounts and redistributed to operating expense and other accounts. For electric plant, the actual or average cost of property replaced or renewed is removed from electric plant and such cost, together with costs of removal less salvage, is charged to accumulated depreciation. 10

14 Notes to Financial Statements Note 2 Summary of Significant Accounting Policies (continued) Management assesses impairment and the existence of asset retirement obligations annually and as circumstances warrant. Investments Investments in associated organizations are carried at cost, plus capital credits allocated and not retired (see Note 4). The Association s investments in marketable securities are classified by management as available for sale and are reported at fair value. Unrealized gains and losses are reported as other comprehensive income and a separate component of equity. The cost of available for sale securities sold is determined based on average cost. Cash and cash equivalents The Association considers short-term investments, except temporary investments, with original maturities of three months or less to be cash equivalents. Receivables Receivables are recorded when invoices are issued, and are written off when they are determined to be uncollectible. The allowance for doubtful accounts is estimated based on historical losses, review of specific problem accounts, existing economic conditions, and the financial stability of customers. Generally, receivables are considered past due after 30 days. Fair value of financial instruments Financial instruments include cash and investments. Investments in associated organizations are not considered a financial instrument because they represent nontransferable interests in such associated organizations. The Association has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Materials and supplies Materials and supplies consist primarily of items for construction and maintenance of the electric plant and are stated at average cost. Deferred debits and liabilities Deferred debits and liabilities consist of deferrals in accordance with generally accepted accounting principles, which include regulatory assets and liabilities. Due to regulation of its rates by its Board, the Association is subject to regulatory accounting requirements. Accordingly, certain costs and income may be deferred as a regulatory asset or liability that would otherwise be charged to expenses or revenues. Regulatory assets and liabilities are recorded when it is probable that future rates will permit recovery (see Note 5 and Note 9). Income taxes The Association is exempt from income taxes under the provisions of Section 501(c)(12) of the Internal Revenue Code. More than 85% of the Association s gross revenue is collected from members. 11

15 Notes to Financial Statements Note 2 Summary of Significant Accounting Policies (continued) The Association has adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) , relating to accounting for uncertain tax positions. As of December 31, 2017 and 2016, the Association does not have any uncertain tax positions. The Association files an exempt organization tax return in the U.S. federal jurisdiction. Patronage capital Margins are assigned to individual Association members capital credit accounts based upon their share of energy usage and payments for electric service provided by the Association during the year. Amounts are assigned to members subsequent to year end. Non-operating margins are allocated to members at the discretion of the Board of Directors. Capital credits are returned to members in accordance with the Association s bylaws, subject to the covenants contained in the long-term debt agreements. Revenue recognition and unbilled revenue The Association utilizes cycle billing and records revenue billed to its customers when the meters are read each month. In addition, the Association records monthly unbilled revenue for electric power delivered but not yet billed. Other comprehensive income (loss) Accounting principles generally require that recognized revenue, expense, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale marketable securities, are reported as a separate component of the equity section of the balance sheet, such items are components of comprehensive income (loss). Pension and other post-retirement benefits The association has a defined benefit pension plan (Plan) and a defined contribution 401(k) plan for employees meeting eligibility requirements. The Association reports the current economic status (the overfunded or underfunded status) of the Plan in its balance sheet and measures the Plan assets and Plan obligations as of the balance sheet date based upon an actuarial analysis (see Note 8). Accrued vacation The Association accrues accumulated unpaid vacation as the obligation is incurred. Accumulated unpaid vacation is included in Accrued expenses. Concentration of credit risk Financial instruments that are exposed to concentrations of credit risk consist primarily of cash, including temporary investments and receivables. Credit is extended to customers generally without collateral requirements; however, deposits are obtained from certain customers and formal shut-off procedures are in place. 12

16 Notes to Financial Statements Note 2 Summary of Significant Accounting Policies (continued) Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Specific estimates include allowance for doubtful accounts, unbilled revenue, depreciation, and pension and post-retirement benefit obligations. Actual results could differ from those estimates. Assets pledged Substantially all assets are pledged as security for long-term debt to the National Rural Utilities Cooperative Finance Corporation (CFC) and CoBank, ACB (CoBank). Reclassifications There have been certain reclassifications to the prior year balance sheet to conform to the current year presentation. The reclassification had no impact to the prior year net margins. Subsequent events Accounting standards require disclosure of the date through which subsequent events have been evaluated, as well as whether the date is the date the financial statements were issued or the date the financial statements were available to be issued. The Association has evaluated subsequent events through April 19, 2018, the date the financial statements were available to be issued. On March 9, 2018, the Association entered into a new loan agreement with CoBank for $20 million which was fully funded on this date. This loan has a fixed rate of 4.55% and will mature in On March 22, 2018, the Association entered into a new loan agreement with CFC for $20 million. No funds have been requisitioned or advanced under this agreement. 13

17 Notes to Financial Statements Note 3 Electric Plant Electric plant consists of the following as of December 31: Distribution plant $ 748,640,287 $ 706,569,951 Generation plant 394,393, ,978,778 General plant 76,996,785 72,042,141 Transmission plant 72,985,809 69,878,267 Generation asset retirement obligation 4,319,021 4,319,021 Intangible plant 16,954 16,954 Plant in service $ 1,297,352,795 $ 1,246,805,112 Construction work in progress distribution and general $ 27,688,713 $ 40,970,379 Construction work in progress Comanche III generation 894, ,420 Construction work in progress $ 28,583,118 $ 41,960,799 Provision has been made for depreciation of generation plant on a straight-line composite rate of 1.895%. Provision has been made for depreciation of transmission and distribution plant on a straight-line composite rate of 2.75%. General plant depreciation rates have been applied on a straight-line basis at rates which will depreciate the assets over their estimated useful lives. Note 4 Investments and Other Assets The Association is a member of various cooperatives and associations. Patronage capital from associated organizations is recorded at the stated amount of the certificates. Patronage capital will be returned to the Association based upon the respective entities bylaws subject to certain restrictions and the financial health of these associations. Investments consist of the following as of December 31: Investment in associated organizations, at cost $ 25,505,282 $ 24,401,360 Nonutility property, net 228, ,804 Investment in marketable securities 144, ,039 Total $ 25,878,027 $ 24,766,203 14

18 Notes to Financial Statements Note 4 Investments and Other Assets (continued) Equities in other organizations at December 31 were as follows: CFC: Capital credits $ 10,673,709 $ 10,066,652 Zero term certificates, maturing through ,076,308 4,276,308 Capital term certificates, 5.00% maturing through ,036,677 2,036,677 Loan term certificates, 3.00% maturing through , ,200 Membership 1,000 1,000 CoBank: Capital credits 7,651,809 6,993,913 Membership 1,000 1,000 Other organizations 155, ,610 Total $ 25,505,282 $ 24,401,360 The Association s investments in marketable securities are presented at fair value, and fall within the Level 1 fair value hierarchy as of December 31, 2017 and Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Note 5 Deferred Debits As part of the resolution of the Colo-Ute bankruptcy and transfer of the power contract to PSCo, the Association paid $17,640,000 to the Trustee in consideration of its Wholesale Power Contract with Colo- Ute and the ability to benefit from certain Western Area Power Administration power allocations and a favorable long-term power supply contract with PSCo. The Association amortized this deferral under the provisions of FASB ASC 980 over a 25 year period. For the years ended December 31, 2017 and 2016, $176,400 and $705,600 was amortized, respectively. Accumulated amortization as of December 31, 2017 and 2016 was $17,640,000 and $17,463,600, respectively. The amortization period ended March 31, Terminal facilities represent the cost of substation high-side equipment that was transferred to PSCo during the years 2000 to The Association is amortizing this deferral under the provisions of FASB ASC 980 over the expected life of this equipment. $294,730 was amortized for the years ended December 31, 2017 and

19 Notes to Financial Statements Note 5 Deferred Debits (continued) Deferred debits at December 31 were as follows: Terminal facilities $ 6,729,341 $ 7,024,072 Xcel Energy operating deposit 4,298,000 4,298,000 Regulatory asset 909,788 - PSCo deferred power costs - 176,400 Long-range study 322, ,674 Miscellaneous 154,124 82,800 Retired employee life/long term care insurance 231, ,619 Total $ 12,644,949 $ 12,127,565 Note 6 Long-Term Liabilities Lien accommodations have been executed with CFC and CoBank. Long-term debt is represented by mortgage notes payable to CFC and CoBank. The agreements contain certain financial and non-financial covenants. Following is a summary of outstanding long-term debt as of December 31: CFC 4.95% to 5.10% notes, maturing 2038 $ 38,204,613 $ 39,249, % to 6.85% notes, maturing ,323, ,849, % notes, maturing ,689,528 14,798,637 CoBank 4.28% to 6.537% distribution construction loans maturing ,444,264 72,619, % to 6.756% generation loans maturing through ,263, ,730, % to 4.01% distribution construction loans maturing through ,853,796 45,747, %, notes maturing ,441,552 14,823,849 Subtotal 708,220, ,819,425 Less: current maturities 21,674,580 18,625,236 Less: conversion option fee 12,129,512 13,022,677 Total $ 674,416,704 $ 695,171,512 16

20 Notes to Financial Statements Note 6 Long-Term Liabilities (continued) During 2016, the Association entered into new loan agreements with CFC to restructure bullet notes into amortizing debt. Also in 2016, $175.6 million of CFC notes were repriced to lower interest rates, resulting in conversion fees of $13.8 million. In accordance with generally accepted accounting principles, these fees are recorded as contra-debt. On April 29, 2016, the Association entered into a new loan agreement with CoBank for $15 million. This loan has a fixed rate of 3.53% and will mature in There were no unadvanced loan funds for distribution construction available to the Association on loan commitments with CoBank or CFC as of year-end. Maturities of long-term debt for the next five years ending December 31 and thereafter are as follows: 2018 $ 21,674, ,448, ,196, ,738, ,464,039 Thereafter 582,698,007 $ 708,220,796 Note 7 Lines of Credit The Association has four general lines of credit at variable interest rates, one with CoBank in the amount of $30,000,000, and three with CFC (a Guaranteed line of credit in the amount of $10,000,000, and two As Offered lines of credit in the amount of $20,000,000 each). The CoBank line has a maturity date of October 31, 2018, and the CFC lines have a maturity date of July 31, 2018, with yearly automatic renewals thereafter, unless terminated by either party. As of December 31, 2017, no funds had been advanced on the CoBank line of credit or the CFC Guaranteed line of credit, and $17,000,000 had been advanced on the CFC As Offered line of credit at an interest rate of 2.35%. As of December 31, 2016, no funds had been advanced on the CoBank line of credit or the CFC Guaranteed line of credit, and $11,000,000 had been advanced on the CFC As Offered line of credit at an interest rate of 2.10%. 17

21 Notes to Financial Statements Note 8 Other Long-Term Obligations At December 31, other long-term obligations were as follows: Pension plan obligations $ 5,378,121 $ 4,504,310 Post-retirement benefit obligations 6,212,177 4,698,667 Asset retirement obligations 6,170,052 5,882,886 Total $ 17,760,350 $ 15,085,863 The Association has three noncontributory defined benefit pension plans that, in total, cover substantially all employees. The plans provide defined benefits based on years of service and compensation rates near retirement. The Association has a post-retirement plan for employees, which provides health insurance and longterm care insurance after retirement. The health care plan is contributory with participants contributions adjusted annually. The long-term care plan is purchased at retirement and participants make yearly contributions toward the cost. The Association will pay up to one-half of the retiree and dependent premiums for any retiree based on the following formula: Ten percent vesting per year beginning at age 55, times the number of service years, times FASB ASC 715 requires recognition of the funded status of post-retirement benefits on the balance sheet, on a prospective basis. The change in the liability for post-retirement benefits is recorded as an adjustment to comprehensive income (loss). 18

22 Notes to Financial Statements Note 8 Other Long-Term Obligations (continued) The following disclosure reflects the obligation and funded status as of December 31: Obligation and Funded Status Post-retirement Pension Benefits Benefit Obligations Actuarial present value of benefit obligations Accumulated benefit obligation $ 15,496,292 $ 13,536,018 $ 7,933,054 $ 6,419,963 Change in benefit obligation Benefit obligation at beginning of year $ 17,869,711 $ 16,875,535 $ 6,419,963 $ 10,340,995 Service cost 1,098, , , ,455 Interest cost 701, , , ,825 Retiree contributions received , ,766 Assumption changes - - 1,595,532 (4,915,530) Actuarial loss (gain) 1,717, ,859 (566,274) (62,385) Benefits paid (663,525) (712,249) (315,141) (257,163) Benefit obligation at end of year $ 20,722,850 $ 17,869,711 $ 7,933,054 $ 6,419,963 Change in plan assets Fair value of plan assets at beginning of year $ 13,365,401 $ 12,639,028 $ 1,721,296 $ 1,763,459 Actual return on plan assets 1,523, ,047 91,436 (23,561) Employer contributions 1,119, , Benefits and expenses paid (663,525) (712,249) (91,855) (18,602) Fair value of plan assets at end of year $ 15,344,729 $ 13,365,401 $ 1,720,877 $ 1,721,296 Reconciliation of funded status Funded status (underfunded)/overfunded $ (5,378,121) $ (4,504,310) $ (6,212,177) $ (4,698,667) Components of net periodic benefit cost Service cost $ 1,098,122 $ 902,273 $ 559,985 $ 413,571 Interest cost 701, , , ,303 Expected return on plan assets (816,951) (772,294) (70,777) (66,875) Amortization of net loss (gain) 137, ,303 (73,333) (168,379) Net periodic benefit cost $ 1,119,774 $ 911,575 $ 746,731 $ 458,620 Amounts recognized in accumulated other comprehensive loss (gain) Net actuarial loss (gain) $ 1,011,077 $ 376,106 $ (1,715,093) $ (2,888,166) Amortization of net (loss) gain (137,266) (108,303) 73, ,379 Total recognized in other comprehensive loss (gain) $ 873,811 $ 267,803 $ (1,641,760) $ (2,719,787) 19

23 Notes to Financial Statements Note 8 Other Long-Term Obligations (continued) Post-retirement Pension Benefits Benefit Obligations Weighted average assumptions used to determine net periodic benefit Discount rate 3.48% 3.99% 4.20% 4.40% Expected return on plan assets 6.00% 6.00% 4.25% 4.00% Rate of compensation increase 3.75% 3.75% N/A N/A Weighted average assumptions used to determine benefit obligations Discount rate 3.48% 3.99% 4.20% 4.20% Expected return on plan assets N/A N/A 4.25% 4.40% Rate of compensation increase 3.75% 3.75% N/A N/A For measurement purposes a 6.8% annual rate of increase, declining to a 4.4% ultimate trend rate of increase in the cost per capita of covered health care benefits was assumed. The Association also has two fully insured pension funds. Total pension costs for the plans for the years ended December 31, 2017 and 2016 amounted to $3,048,808 and $2,937,828, respectively. The Association has a 401(k) savings plan for employees. Employer contributions for the years ended December 31, 2017 and 2016 amounted to $734,806 and $674,990, respectively. Plan Assets Weighted average asset allocations, by asset category: Post-retirement Pension Benefits Benefit Obligations Debt securities 24% 24% N/A N/A Equity securities 44% 41% 24% 22% Insurance company general account 32% 35% N/A N/A Money market funds N/A N/A 76% 78% Total 100% 100% 100% 100% 20

24 Notes to Financial Statements Note 8 Other Long-Term Obligations (continued) Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows: Pension Benefits Post-retirement Benefit Obligations 2018 $ 362,100 $ 123, ,025, , , , , , ,083, ,240 Years ,316,459 1,496,677 Asset Retirement Obligations During 2010, construction was completed on the Comanche III generating facility. As of the date of completion, the Association became legally obligated to share in the costs to dismantle and remove Comanche III at the termination of its estimated useful life of 60 years. Accordingly, a liability was established equal to the present value of the Association s obligation, and the carrying amount of Comanche III was increased by the same amount. This liability has increased by applying the interest method of accretion to the liability and the capitalized costs have been depreciated over the useful life of fifty-three years. The following is a reconciliation of the aggregate retirement liability associated with the Association s obligation to dismantle and remove Comanche III: Balance December 31, 2015 $ 5,609,088 Increase in the present value of the obligation (accretion) 273,798 Balance December 31, ,882,886 Increase in the present value of the obligation (accretion) 287,166 Balance December 31, 2017 $ 6,170,052 21

25 Notes to Financial Statements Note 9 Deferred Liabilities A regulatory balancing account was authorized by the Association s Board of Directors to normalize the costs related to the three-year cyclical maintenance outages planned for Comanche III. The regulatory balance has been established under the provisions of FASB ASC 980. The Association will recover the outage costs through consumer rates. At December 31, deferred liabilities were as follows: Customers advances for construction $ 3,076,690 $ 3,900,304 Regulatory liability - 1,458,170 Customers energy prepayments 1,552,668 1,531,159 Deferred installation costs of special equipment 1,143,104 1,268,920 Unamortized joint use income 136, ,360 Total $ 5,908,822 $ 8,294,913 Note 10 Commitments and Contingencies The Association is a joint owner with PSCo and Holy Cross Energy in Comanche III. The Association is obligated to fund its percentage ownership share of the operating, maintenance and capital costs of the plant and is entitled to that share of the plant s generation. The Association entered into an interconnection agreement and a power purchase agreement with Victory Solar LLC, owners of a solar power generating facility. The Association is obligated to purchase all of the energy generated by the facility. The facility is contractually obligated to generate 2,447 MWh per MW AC during the first year of the agreement, which is reduced annually by 12 MWh per MW AC until the contract ends in

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