ML17115A175

Dairyland Power Cooperative - Financial Statement and Auditors' Report for 2015 and 2016

ML17115A175
Person / Time
Site:	La Crosse File:Dairyland Power Cooperative icon.png
Issue date:	04/21/2017
From:	Nick B Dairyland Power Cooperative
To:	Document Control Desk, Office of Nuclear Material Safety and Safeguards
References
LAC-14400
Download: ML17115A175 (30)

Text

BARBARA A. NICK President and CEO DAIRYLAND POWER COOPERATIVE April 21, 2017 In reply, please refer to LAC-14400 DOCKET NO. 50-409 ATTN: Document Control Desk U.S. Nuclear Regulatory Commission Washington, DC 20555-0001

SUBJECT:

Dairyland Power Cooperative La Crosse Boiling Water Reactor (LACBWR)

Possession-Only License DPR-45 Financial Statement and Auditors' Report

REFERENCE:

1) 10 CFR 50.71(b)

In accordance with the requirements of Reference 1, we are forwarding three (3) copies of the Financial Statements and Independent Auditors' Reports for Dairyland Power Cooperative as of December 31, 2016 and 2015. We will forward our 2016 Annual Report to you when it is completed.

Sincerely,

~ President and CEO BAN:KAS:krm G:\Shared\Audit\2016 Audit\NRC Audit Transmittal Letter Of Financial Statements 04212017.Docx Enclosures cc: Cynthia D. Pederson, NRC Regional Administrator Marlayna Vaaler, NRC, FSME Ed Bowen, DPC Cheryl Olson, DPC LACBWR A Touchstone Energy<> Cooperative ~

3200 East Ave. S. *PO Box 817 *La Crosse, WI 54602-0817

• 608-787-1449

• 608-787-1321 fax* www.dairynet.com Dairyland Power Cooperative is an equal opportunity provider and employer.

STATE OF WISCONSIN)

COUNTY OF LA CROSSE Personally came before me this oU s + day of 4e. Iri' , 2017, the above named, Barbara A. Nick, to me known to be the person who executed the foregoing instrument and acknowledged the same.

My commission expires _5 __-_0?_5'_-_2_o_;_g;_

LAURIE A. ENGEN Notary Public State of Wisconsin

Dairyland Power*

Coop*erative and Subsidiary Consolidated Financial Statements as of and for the Years Ended December 31, 2016 and 2015, and Independent Auditors' Report

Deloitteo Deloitte & Touche LLP Suite 2800 50 South Sixth Street Minneapolis, MN 55402-1538 USA .

Tel: +1 612 397 4000 Fax: +1 612 397 4450 INDEPENDENT AUDITORS' REPORT www.deloitte.com Board of Directors Dairyland Power Cooperative La Crosse, Wisconsin We have audited the accompanying consolidated financial statements of Dairyland Power Cooperative and subsidiary (the "Cooperative"), which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of revenues, expenses, and comprehensive income, member and patron equities, and cash flows for tlie years then ended, and the related notes to the consolidated financial statements.

Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 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. Those standards require that we plan and perform the audit 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 discloswes in the consolidated financial statements. The procedures selected depend on the auditor's 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 Cooperative'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 Cooperative'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 financial position of the Cooperative as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

March 28, 2017

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2016 AND 2015 (In thousands) 2016 2015 ASSETS ELECTRIC PLANT:

Plant and equipment-at original cost $ 1,691,311 $ 1,569,980 Less accumulated depreciation (612,445) (580,036)

Net plant and equipment 1,078,866 989,944 Construction work in progress 109,556 189,855 Total electric plant 1,188,422 1,179,799 OTHER ASSETS:

Nuclear decommissioning funds 74,343 94,676 Investments under debt agreements-marketable securities 3,783 3,779 Other property and investments 11,721 10,885 Investments in capital term certificates of National Rural Utilities Cooperative Finance Corporation 9,176 9,176 Regulatory assets (Note 1) 29,995 54,199 Investment for deferred compensation 1,603 1,429 Deferred charges (Note 1) 16,909 28,139 Total other assets 147,530 202,283 CURRENT ASSETS:

Cash and cash equivalents 27,278 26,386 Accounts receivable:

Energy sales-net of allowance for doubtful accounts of $10 for 2016 and 2015, respectively 37,362 35,287 Other 1,942 2,479 Inventories:

Fossil fuels 59,863 49,220 Materials and supplies 19,769 20,086 Prepaid expenses and other 21,078 16,225 Total current assets 167,292 149,683 TOTAL $1,503,244 $ 1,531,765 (Continued)

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2016 AND 2015 (In thousands) 2016 2015 CAPITALIZATION AND LIABILITIES CAPITALIZATION:

Member and patron equities:

Membership fees $ 1 $ 1 Patronage capital 273,501 254,265 Accumulated other comprehensive income 2(289 2(415 Total member and patron equities 275,791 256,681 Long-term obligations 772(961 775(857 Total capitalization 1(048(752 1(032(538 OTHER LIABILITIES:

Decommissioning and asset retirement obligations 81,380 97,230 Postretirement health insurance obligation 4,669 4,482 Accrued benefits 853 888 Deferred compensation 1,603 1,429 Obligations under capital leases 5,615 3,974 Other deferred credits (Note 1) 69(263 761336 Total other liabilities 163,383 184,339 COMMITMENTS AND _CONTINGENCIES (Note 10)

CURRENT LIABILITIES:

Current maturities of long-term obligations and obligations under capital leases 52,899 49,409 Line of credit 108,000 196,000 Advances from member cooperatives 13,274 10,758 Accounts payable 38,835 32,459 Accrued expenses:

Payroll, vacation, and benefits 6,980 7,133 Interest 9,500 238 Property and other taxes 3,919 3,190 Special refund to members (Note 15) 47,636 Other

• 101066 15(701 Total current liabilities 2911109 3141888 TOTAL $1,503,244 $ 1,531,765 See notes to consolidated financial statements. (Concluded)

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARY CONSOLIDATED STATEMENTS OF REVENUES, EXPENSES AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In thousands) 2016 2015 UTILITY OPERATIONS:

Operating revenues:

Sales of electric energy $392,123 $398,933 Other 22,709 19,391 Total operating revenues 414,832 418,324 Operating expenses:

Fuel 107,746 114,191 Purchased and interchanged power 61,651 74,130 Other operating expenses 92,693 84,309 Depreciation and amortization 48,989 44,619 Maintenance 40,198 32,579 Property and other taxes 8,230 8,916 Total operating expenses 359,507 358,744 Operating margin before interest and other 55,325 59,580 Interest and other:

Interest expense 39,817 39,844 Allowance for funds used in construction-equity (1,591) (2,776)

Other-net 1,639 3,376 Total interest and other 39,865 40,444 OPERATING MARGIN 15,460 19,136 NONOPERATING MARGIN (Note 1). 7,686 7,590 NET MARGIN AND EARNINGS 23,146 26,726 OTHER COMPREHENSIVE LOSS-Postretirement health insurance obligation adjustments (126) (304)

COMPREHENSIVE INCOME ~ 231020 $ 26,422 See notes to consolidated financial statements.

DAIRYLAND .POWER COOPERATIVE AND SUBSIDIARY CONSOLIDATED STATEMENTS OF MEMBER AND PATRON EQUITIES FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In thousands)

Accumulated Total Other Member Membership Comprehensive Patronage and Patron Fees Income (Loss) Capital Equities BALANCE-December 31, 2014 $ 1 $2,719 $231,196 $233,916 Net margin and earnings 26,726 26,726 Postretirement health insurance obligation adjustments (304) (304)

Retirement of capital credits (3,657) (3,657)

BALANCE-December 31, 2015 1 2,415 254,265 256,681 Net margin and earnings 23,146 23,146 Postretirement health insurance obligation adjustments (126) (126)

Retirement of capital credits (3,910) (3,910)

BALANCE-December 31, 2016  !..1. $2,289 $273,501 $275,791 See notes to consolidated financial statements.

OAIRYLAND POWER COOPERATIVE AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (In thousands) 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES:

Net margin and earnings $ . 23,146 $ 26,726 Adjustments to reconcile net margin and earnings to net cash provided by operating activities:

Depreciation and amortization:

Charged to operating expenses 48,989 44,619 Charged through other operating elements such as fuel expense 1,754 1,731 Allowance for funds used in construction-equity (1,591) (2,776)

Gain on sale of property and equipment (904)

Changes in operating elements:

Accounts receivable (1,538) 6,052 Inventories (10,812) (9,441)

Prepaid expenses and other assets (4,853) (6,878)

Accounts payable 12,727 (2,517)

Accrued expenses and other liabilities 42,668 75,841 Deferred charges and other 38,743 (19,944)

Total adjustments 126,087 85,783 Net cash provided by operating activities 149,233 112,509 CASH FLOWS FROM INVESTING ACTIVITIES:

Electric plant additions (56,283) (78,395)

Advances to nuclear decommissioning funds (8) (78)

Proceeds from sale of property and equipment 1,529 Purchase of investments (547,107) (172,873)

Proceeds from sale of investments and economic development loans 546,278 172,055 Net cash used in investing activities (57,120) (77,762)

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under line of credit 79,000 123,000 Repayments under line of credit (167,000) (54,000)

Borrowings under long-term obligations 99,090 45,816 Repayments of long-term obligations (100,917) (136,051)

Retirement of capital credits (3,910) (3,657)

Borrowings of advances from member cooperatives 219,173 226,078 Repayments of advances from member cooperatives (216,657) (235,418)

Net cash used in financing activities (91,221) (34,232)

NET INCREASE IN CASH AND CASH EQUIVALENTS 892 515 CASH AND CASH EQUIVALENTS-Beginning of year 26,386 25,871 CASH AND CASH EQUIVALENTS-End of year $ 27,278 $ 26,386 SUPPLEMENTAL CASH FLOW INFORMATION:.

Cash paid for interest $ 32,575 $ 43i067 Electric plant additions funded through accounts payable and accrued expenses $ 4,764 $ 11,115 Electric plant additions under capital leases $ 4,062 $ 2,752 See notes to consolidated financial statements.

DAIRYLAND POWER COOPERATIVE AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2016 AND 20.15 (All dollar amounts in thousands)

1. NATURE OF BUSINESS AND ORGANIZATION Business-Dairyland Power Cooperative and subsidiary ("Dairyland" or the "Cooperative")

is an electric generation and transmission cooperative organized under the laws of the states of Wisconsin and Minnesota. The Cooperative, whose principal offices are located in Wisconsin, provides wholesale electric service to class A members engaged in the retail sale of electricity to member consumers located in Wisconsin, Minnesota, Iowa and Illinois, and provides electric and other services to class C, D and E members.

Principles of Consolidation-The consolidated financial statements include the accounts of Dairyland and Dairyland's wholly owned subsidiary, Genoa FuelTech, Inc. All intei-company balances and transactions have been eliminated in consolidation.

Accounting System and Reporting- The accounting records of the Cooperative are maintained in accordance with the uniform system of accounts prescribed by the Federal Energy Regulatory Commission as adopted by the Rural Utilities Service (RUS), the Cooperative's principal regulatory agency.

Electric Plant-The cost of renewals and betterments of units of property (as distinguished from minor items of property) includes contract work, direct labor and materials, allocable overhead, and allowance for funds used during construction, and is charged to electric plant accounts. Included in accumulated depreciation are nonlegal or noncontractual costs of removal components. As a result, the cost of units of property retired, sold or otherwise disposed of, plus removal costs, less salvage, is charged to accumulated depreciation and no profit or loss is recognized in connection with ordinary retirements of property units. A provision for these nonlegal or noncontractual costs of removal components is recognized based on depreciation rates determined by a third-party depreciation study completed in July 2011 and approved by RUS in 2012. An update to this study was completed in November 2016 and approved by RUS in 2017 for rates effective in 2017. The Cooperative is unable to obtain the information to separate the cumulative removal costs as of December 31, 2016 and 2015. Maintenance and repair costs and replacement and renewal of minor items of property are charged to operations.

Depreciation-Depreciation, which is based on the straight-line method at rates that are designed to amortize the original cost of properties over their estimated useful lives, includes a provision for the cost of removing and decommissioning the properties. The provision for depreciation averaged 3.1% of depreciable plant balances for 2016 and 3.0%

for 2015.

Allowance for Funds Used During Construction-Allowance for funds used during construction (AFUDC) represents the cost of external and internal funds used for construction purposes, and is capitalized as a component of electric plant by applying a rate (4.12% in 2016 and 3.61% in 2015) to certain electric plant additions under construction. The amount of such allowance was $3,055 in 2016 and $5,272 in 2015. The borrowed funds component of AFUDC for 2016 and 2015, was $1,464 and $2,496, respectively (representing 1.99% and 1. 71 % in 2016 and 2015; respectively). The equity component of AFUDC for 2016 and 2015 was $1,591 and $2,776, respectively, (representing 2.13% and 1.90% in 2016 and 2015, respectively). The borrowed funds components were included as a reduction of interest expense in the consolidated statements of revenues, expenses and comprehensive income.

Recoverability of Long-Lived Assets-The Cooperative accounts for the impairment or disposal of long-lived assets, such as property and equipment, whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable.

An impairment loss is recognized when estimated undiscounted cash flows expected to result from the use of the asset, plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value based on quoted market prices or other valuation techniques. To date, management has determined that no impairment of these assets exists.

Investments-Investments in marketable debt and equity securities classified as available for sale are reported at fair value, with the interest, dividend income and realized gains reported in nonoperating margin. The Cooperative continually monitors the difference between cost and estimated fair Value of its investments. If any of the Cooperative's investments experience a decline in value that the Cooperative believes is other than temporary, the Cooperative will realize the loss as a reduction in investment income on decommissioning funds. In 2016 and 2015, the Cooperative realized $1,189 and $3,018, respectively, of losses on these investments as a result of other-than-temporary impairment (OTT!).

Regulatory Assets and Liabilities-The Cooperative's accounting policies and the consolidated financial statements conform to accounting principles generally accepted in the United States of America applicable to electric cooperatives. During 2015, the Cooperative established a regulatory asset for a contract termination fee related to a power purchase agreement. This is being amortized to purchased power expense over the five:..year remaining term of the original contract beginning November 2015. During 2014, the Cooperative established a regulatory asset related to unrecovered plant balances upon closure of the Alnia 4&5 generating stations. This is being amortized through rates over 10 years beginning in 2015. The expected following year's portion of these regulatory assets is included in other current assets at December 31, 2016 and 2015, respectively.

During 2013, the Cooperative established a regulatory asset of $16,700 for increased estimated costs in the nuclear decommissioning liability. During 2016, this regulatory asset was offset against settlement proceeds received from the second nuclear contract damages claim with the U.S. government as described in Note 15.

• The noncurrent portion of regulatory assets as of December 31, 2016 and 2015, include the following:

2016 2015 Power purchase contract termination fee $15,491 $20,958 Alma 4&5 unrecovered plant balances 14,504 16,541 Nuclear decommissioning methodology change 16,700 Total regulatory assets $29,995 $54,199 Deferred Charges-Deferred charges represent future revenue to the Cooperative associated with costs that will be recovered from customers through the rate-making process. As of December 31, 2016 and 2015, the Cooperative's deferred charges are being reflected in rates charged to customers, except the deferred nuclear litigation and plant expenses as noted below. If all or a separable portion of the Cooperative's operations become no longer subject to the provisions of regulatory accounting, a write-off of deferred charg*es would be required, unless some form of transition recovery (refund) continues through rates established and collected for the Cooperative's remaining regulated operations. In addition, the Cooperative would be required to determine any impairment to the carrying costs of deregulated plant and inventory assets. The noncurrent portion of deferred charges as of December 31, 2016 and 2015, include the following:

2016 2015 Pension prepayment $13,449 $16,139 Deferred nuclear litigation and plant expenses 9,228 Other 3,460 2,772 Total deferred charges $16,909 $28,139 The voluntary prepayment to the Cooperative's multiemployer defined-benefit pension plan to reduce future funding amounts is being amortized to benefits expense over 10 years beginning in 2013 as prescribed by RUS'. Deferred litigation expenses and certain plant expenses from the second nuclear contract damages claim against the United States government, as discussed in Note 15, were offset against settlement proceeds received in 2016 from that claim.

Cash and Cash Equivalents-Cash equivalents include all highly liquid investments with original maturities of three months or less. Cash equivalents consist primarily of commercial paper, stated at cost, which approximates market.

Fossil Fuels and Materials and Supplies-Coal inventories as well as materials and Supplies inventories are stated at the lower of average cost or market prices.

Nitrogen Oxide Emission Allowances-Beginning in 2009, the U.S. Environmental Protection Agency (EPA) requires power plants to hold sufficient allowances to cover emissions of nitrogen oxide. Under these requirements, the Cooperative is required to surrender one emission allowance per ton of nitrogen oxide emitted. Actual emissions during 2016 and 2015 did not require the Cooperative to purchase additional allowances beyond what was allocated under the program. As of December 31, 2016 and 2015, allowances are recorded in inventory at lower of average cost or market prices at a total cost of $0. The obligations to EPA to meet 2016 and 2015 emissions are $0. The transfer to EPA for the 2015 annual allowances occurred in May 2016. The transfer to EPA for the 2016 annual allowances is expected to occur in May 2017. The remaining allowances in inventory as of December 31, 2016, will be surrendered to EPA, as applicable, under the terms of the consent decree described in Note 10.

Deferred Credits-Deferred credits represent both future revenue to the *Cooperative associated with customer prepayments and noncurrent obligations and reserves related to operations. As of December 31, 2016, the Cooperative's deferred credits are being considered when determining rates charged to customers.

The noncurrent portion of deferred credits as of December 31, 2016 and 2015, include the following:

2016 2015 Unearned revenue-contract prepayment $68,744 $74,472 Environmental mitigation projects 660 Plant salvage reserve 690 Other 519 514 Total deferred credits $69,263 $76,336 Unearned Revenue-contract prepayment is from the settlement payment received from Great River Energy (GRE) as discussed in Note 13, and is being recognized into revenue through 2029. Costs for environmental mitigation projects are being incurred annually and must be completed by 2018, as discussed in Note 10. Remaining amounts for those projects are expected to be incurred in 2017 and are included in accrued expenses. Plant salvage reserve was applied to the Alma plant dismantlement project during 2016.

Sales of Electric Energy-Revenues from sales of electric energy are recognized when energy is delivered. The class A wholesale rates approved by the Cooperative's board of directors (the "Board of Directors") have a power cost adjustment that allows for increases or decreases in class A member power billings based upon actual power costs compared to plan. For 2016 and 2015, the power cost adjustment to the class A members resulted in (credits) to sales billed of $(5,450) and $(2,198), respectively. These amounts are recorded in sales of electric energy in operating revenues on the consolidated statements of revenues, expenses and comprehensive income.

Other Operating Revenue-Other operating revenue primarily includes revenue received from transmission service and is recorded as services are provided. During 2015, the Cooperative's board of directors implemented a revenue deferral plan which was approved by RUS in February 2016. Other operating revenue for 2015 was reduced by $4,400 and was deferred into 2016 revenue recognition. As a condition of the RUS approval for the plan, the Cooperative was to maintain a segregated cash balance of at least the amount of unrecognized deferred revenue during the year. The Cooperative has met this requirement, through its deposits in the RUS debt prepayment program.

Accounting for Energy Contracts-Contracts that did not meet the accounting definition of a derivative are accounted for at historical cost. The Cooperative's energy contracts that qualify as derivatives continue to be accounted for at fair value, unless those contracts meet the requirements of and have been designated as "normal purchase/normal sale."

The Cooperative does not have any energy contracts tliat are required to be accounted for at fair value as of December 31, 2016 and 2015.

Nonoperating Margin-The nonoperating margin for the years ended December 31, 2016 and 2015, includes the following:

2016 2015 Investment income $ 6,722 $ 5,529 Investment income on nuclear decommissioning funds:

Net earnings (losses) 3,153 (14)

Realized gains 5,703 2,439 Realized losses and losses due to OTII (9,070) (3,799)

Provision-recorded as estimated decommissioning liabilities 214 1,374 Other 964 2,061 Nonoperating margin $ 7,686 $ 7,590 Use of Estimates-The preparation of consolidated 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 the 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. Significant estimates in the consolidated financial statements relate to inventory reserve, postretirement benefit obligations, asset retirement obligation liabilities, fixed-asset depreciable lives, and litigation and contingencies. Actual results

• could differ from those estimates.

Accumulated Other Comprehensive Income-Accumulated other comprehensive income is comprised solely of a postretirement health insurance obligation. See additional information in Note 11. The components for the years ended December 31, 2016 and 2015, are as follows:

2016 2015 Balance-beginning of year $2,415 $2,719 Recognition in expense:

Amortization of prior service cost (102) (102)

Amortization of unrecognized actuarial gain (131) (158)

Actuarial assumption changes 107 (44)

Net other comprehensive loss (126) (304)

Balance-:-end of year $2,289 ~2,415 Concentration of Risk-Approximately 44% of the labor force for the Cooperative is under a collective bargaining agreement that expires January 31, 2019.

Subsequent Events-The Cooperative considered events for recognition or disclosure in the consolidated financial statements that occurred subsequent to December 31, 2016, through March 28, 2017, the date the consolidated financial statements were available to be issued. All material subsequent events have been disclosed in these consolidated financial statements.

2. RECENTLY ISSUED ACCOUNTING STANDARDS UPDATES Adopted-In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330). This guidance requires entities to measure most inventory "at the lower of cost and net realizable value," thereby simplifying the current guidan,ce under which an entity must measure inventory at the lower of cost or market. This guidance was adopted by the Cooperative in 2016 and had no material impact on the consolidated financial statements.

Issued-In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should 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. In August 2015, the FASB issued ASU 2015-1, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year for all entities and permits early adoption on a limited basis.

ASU 2014-09 is effective for the Cooperative in 2019. Management is in the process of evaluating the guidance and has not yet determined if the adoption of this guidance will have a material impact on the Cooperative's consolidated financial statements Iri February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The Cooperative is still in the process of evaluating the impact this guidance will have on the consolidated financial statements. This guidance is effective for the Cooperative in 2020.

3. INCOME TAXES The Internal Revenue Service has determined that Dairyland is exempt from federal income taxes under Section 501(c)(12) of the Internal Revenue Code. Accordingly, the Cooperative's utility operations are generally exempt from federal and state income taxes and no provision for such taxes is recorded in the consolidated financial statements.

4. AVAILABLE-FOR-SALE INVESTMENTS Investments in the nuclear decommissioning trust (NDT) and under debt agreements are.

classified as available-for-sale, recorded cit fair value, and include the following as of December 31, 2016 and 2015:

Fair Value Debt 2016 NOT Agreements Total Cash and cash equivalents $ 3,427 $3,783 $ 7,210 U.S. government securities 19,016 19,016 Corporate bonds 49,759 49,759 Foreign obligations 2,141 2,141

$74,343 $3,783 $78,126 Fair Value Debt 2015 NOT Agreements Total Cash and cash equivalents $ 3,440 $3,779 $ 7,219 U.S. government securities 61,314 61,314 Corporate bonds 26,342 26,342 Foreign obligations 3,580 3,580

$94,676 ~p 1 779 ~981455 Investments under debt agreements represent amounts arising from the sale of assets that are encumbered by mortgages and restricted by the RUS for use on future generation and transmission construction projeds.

The contractual maturities of marketable debt securities, which include U.S. government securities, foreign obligations and corporate bonds, as of December 31, 2016, are as follows:

Fair Value Cost Due within 1 year $ 3,989 $ 5,236 Due after 1 year through 5 years 33,278 33,464 Due after 5 years through 10 years 15,576 15,978 Due after 10 years 181073 18,633

$701916 $731311

-- - - ____J

Information regarding the sale of available-for-sale marketable securities, including nuclear decommissioning trusts, for the years ended December 31, 2016 and 2015, is as follows:

2016 2015 Proceeds from sale of securities $543,732 $171,873 Realized (losses)/gains (2,178) 1,658 For the purposes of determining realized gains and losses, the cost of securities sold is based upon specific identification.

Securities in the portfolio are reviewed to determine whether they have been other-than-temporarily impaired. The Cooperative has recorded impairment write-downs of its investments of $1,189 and $3,018 in 2016 and 2015, respectively, as the Cooperative cannot represent that it has the intent and ability to hold securities until they recover in value, since that decision is outside of its sole control. In accordance with restrictions enacted by the Nuclear Regulatory Commission, the Cooperative does not control the day-to-day management of nuclear decommissioning trust fund investments. The nuclear decommissioning trust of the Cooperative is managed by Independent investment managers with discretion to buy, sell and invest to achieve the broad investment objectives set forth by the Cooperative.

Investment income included in nonoperating margin on the consolidated statements of revenues, expenses and comprehensive income is net of investment fees of approximately

$298 and $416 for the years ended December 31, 2016 and 2015, respectively.

5. LINES OF CREDIT To provide interim financing capabilities, the Cooperative has arranged committed lines of credit with availability aggregating approximately $350,000. On November 30, 2015, a syndicated credit facility was executed with CoBank acting as lead arranger. This facility has a five-year term and provides funds both for short-term working capital requirements and for capital projects until permanent financing can be obtained. Some capital projects will last longer than one year, but the intent is to pay down the line of credit as permanent funding is received. Compensating balance requirements and fees relating to the lines of credit were not significant in 2016 and 2015. Information regarding line of credit balances and activity for the years ended December 31, 2016 and 2015, is as follows:

2016 2015 Interest rate at year-end ====

1.76 % 1.42 %

Total committed availability at year-end . $350,000 $350,000 Total borrowings outstanding at year-end $108,000 $196,000 Average borrowings outstanding during year $178,308 $126,000 The Cooperative also allows member cooperatives to prepay their power bills and pays interest on these prepayments based on current short-term borrowing ,rates. Advances from member cooperatives totaled $13,274 and $10,758 at December 31, 2016 and 2015, respectively. Interest expense on member cooperative advances was $111 and $103 at December 31, 2016 and 2015, respectively. These amounts have been included in interest expense in the consolidated statements of revenues, expenses, and comprehensive income.

6. LONG-TERM OBLIGATIONS Long-term obligations as. of December 31, 2016 and 2015, consist of the following:

2016 2015 Federal Financing Bank obligations-1.93-4.46% $380,833 $334,386 Federal Financing Bank obligations-4.52-6.80% 315,128 347,324 Total Federal Financing Bank 695,961 681,710 RUS obligations-4.125% and grant funds 4,839 5,237 CoBank notes-2.6%, 2.9%, 4.3%, 6.2%, and 7.4% 35,801 46,113 Private bonds placement obligations-3.42% 87,500 90,833 Long-term debt 824,101 823,893 Less current maturities (51,140) (48,036)

Total long--term obligations ~7721961 ~7751857 Quarterly principal and interest payments on the long-term obligations to the Federal Financing Bank (FFB) extend through 2048. Long*-term obligations to FFB are net of deposits in the RUS debt prepayment program of $214,581 and $154,714 as of December 31, 2016 and 2015, respectively. These deposits earn 5% interest and are available solely for future principal and interest payments.

Long-term obligations to the RUS are payable in equal monthly principal and interest installments through 2024. Payments on the CoBank 2.6%, 2.9%, 4.3%, 6.2%, and 7.4%

notes are due monthly or quarterly through 2023. The private bond placement is an amortizing 30-year term loan at an interest rate of 3.42%. Quarterly principal and interest payments on this obligation extend through 2043.

The Cooperative executed, filed and recorded an indenture of mortgage, security agreement and financing statement, dated as of September 13, 2011 (the "Indenture"),

between the Cooperative, as grantor and U.S. Bank National Association, as trustee. The perfected lien of the Indenture on substantially all of the Cooperative's assets secured equally and ratably all of the Cooperative's long-term debt with the exception of unsecured notes to CoBank (balances of $21,989 and $28,243 at December 31, 2016 and 2015, respectively). The Cooperative is required to maintain and has maintained certain financial ratios related to earnings in accordance with the covenants of its loan agreements as of December 31, 2016.

Scheduled maturities of the Cooperative's long-term obligations as of December 31; 2016, were as follows:

Years Ending December 31 2017 $ 51,140 2018 46,558 2019 46,013 2020 46,181 2021 45,525 Thereafter 588,684 Total $824,101

7. LEASES Operating Leases-The Cooperative has entered into lease agreements under which it is the lessee on an operating lease for a Caterpillar coal dozer, six rail cars and fleet vehicles.

These transactions are covered in the master lease agreement and have lease terms ranging from four to 15 years. At the end of the leases, the Cooperative can either purchase the equipment at fair market value, continue to lease the assets, or return the equipment to the lessor. Rent expense was $590 and $628 in 2016 and 2015, respectively.

The schedule of future minimum lease payments as of December 31, 2016, is as follows:

Years Ending December 31 2017 $ 443 2018 378 2019 301 2020 136 2021 39 Thereafter 72 Total $1,369 Capital Leases-The Cooperative has entered into several capital lease agreements for work equipment and computer equipment. The transactions are covered in the master lease agreement with lease terms of four, five or nine years. At the end of the lease, the Cooperative can purchase the equipment for a bargain purchase price. The gross amount of the leases was $4,137 and $2,804 as of December 31, 2016 and 2015, respectively. The accumulated amortization of the capital leases was $2,360 and $1,856 as of December 31, 2016 and 2015, respectively. The principal and interest payments were $1,991 and $1,335 in 2016 and 2015, respectively. The schedule of future minimum lease payments as of December 31, 2016, is as follows:

Years Ending December 31 2017 $ 1,964 2018 1,875 2019 1,560 2020 1,306 2021 824 Thereafter 383 Total minimum lease payments 7,912 Amounts* representing interest (538)

Present value of minimum lease payments 7,374 Current maturities (1,759)

Long-term capital lease obligations $ 5,615

8. FINANCIAL INSTRUMENTS The fair value of the Cooperative's financial instruments other than marketable securities and short-term borrowings, based on the rates for simila.r securities and present value models using current rates available as of December 31, 2016 and 2015, is estimated to be as follows:

2016 2015 Recorded Fair Recorded Fair Value Value Value Value Assets:

Other property and investments $ 11,721 $ 11,721 $ 10,885 $ 10,885 Investments in capital term certificates of NRUCFC 9,176 9,176 9,176 9,176 Liabilities-long-term obligations 824,101 1,149,059 823,893 1,122,868 Assets and Liabilities Measured at Fair Value-'-Accounting principles generally accepted in the United States of America establish a framework for measuring fair value by creating a hierarchy for observable independent market inputs and unobservable market assumptions and provides for required disclosures about fair value measurements.

Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange.

A description of the inputs used in the valuation of assets and liabilities are as follows:

Level 1 inputs utilize observable market data in active markets for identical assets or

• liabilities. Level 2 inputs consist of observable market data, other than that included in Level 1, that are either directly or indirectly observable. Level 3 inputs consist of unobservable market data, which are typically based on an entity's own assumptions of what a market participant would use in pricing an asset or liability as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest-level input that is significant to the fair v.alue measurement in its entirety. The Cooperative's assessment of the significance of a particular input to the fair value mecisurement in its entirety requires judgment and considers factors specific to the asset or liability.

The following table summarizes the Cooperative's assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and 2015, aggregated by the level in the fair value hierarchy within which those measurements fall:

Fair Value Measurements Using Quoted Prices in Significant Active Markets for Other Significant Identical Assets Observable Unobservable and Liabilities Inputs Inputs 2016 Fair Value (Level 1) (Level 2) (Level 3)

Assets-investments:

Nuclear decommissioning funds $ 74,343 $74,343 $ - $ -

Investments under debt agreements-marketable securities 3,783 3,783 Other property and investments 11,721 1,373 10,348 Investments in capital term certificates of National Rural Utilities Finance Corporation 9,176 9,176 Investment for deferred compensation 1,679 1,679

$100,702 $ 75,716 ~5,462 ~ 19,524 Fair Value Measurements Using Quoted Prices in Significant Active Markets for Other Significant Identical Assets Observable Unobservable and Liabilities Inputs Inputs 2015 Fair Value (Level 1) (Level 2) (Level 3)

Assets-investments:

Nuclear decommissioning funds $ 94,676 $94,676 $ - $ -

Investments under debt agreements-marketable securities 3,779 3,779 Other property and investments 10,885 1,145 9,740 Investments in capital term certificates of National Rural Utilities Finance Corporation 9,176 9,176 Investment for deferred compensation 1,512 1,512

$120,028 $ 95,821 ~ 5,291 ~ 18,916 There were no significant transfers between Levels 1, 2 and 3 in 2016. The changes in Level 3 recurring fair value measurements using significant unobservable inputs for the years ended December 31, 2016 and 2015, are as follows:

2016 2015 Other property and investments:

Balance-beginning of year $ 9,740 $9,040 New investment and loans made 2,850 675 Loan repayments received and current maturities (259) (210)

Patronage capital allocations 267 235 Refunds of deposits (2,250)

. Balance-,-end of year ~101348 ~91740 The valuation of these assets involved management's judgment after consideration of market factors and the absence of market transparency, market liquidity and observable inputs.

9. RETIREMENT OF CAPITAL CREDITS The Cooperative's Board of Directors has adopted a policy of retiring capital credits allocated to members on a first-in, first-out basis. As part of an equity development strategy adopted in 2003, patron_age capital retired will be limited to no greater than 2% of the total assigned patronage capital balance as of December 31 of the prior year. This policy is subject to annual review and approval by the Board of Directors and the RUS, and no cash retirements are to be made which would impair the financial condition of the Cooperative or violate any terms of its agreements. Since 2003, the amount of nonoperating margins assigned to members each year is at the discretion of the Board of Directors. Any unassigned nonoperating margins will become unallocated reserves and part of permanent equity. Patronage capital amounts for the years ended December 31, 2016 and 2015, are as follows:

Assigned Unassigned Total Balance-December 31, 2014 $182,823 $48,373 $231,196 Retirement of capital credits (3,657) (3,657)

Current year margins 16,359 10,367 26,726 Balance-December 31, 2015 195,525 58,740 254,265 Retirement of capital credits (3,910) (3,910)

Current year margins 13,869 9,277 23,146 Balance-December 31, 2016 $205,484 $68,017 $273,501

10. COMMITMENTS AND CONTINGENCIES The Cooperative is a party to a number of generation, transmission and distribution agreements, under which costs and/or revenues are recognized currently based upon the Cooperative's interpretations of the provisions of the related agreements. Differences between the estimates used in the consolidated financial statements and the final settlements are recorded in the year of settlement.

The Cooperative has entered into various coal purchase contracts with one- to four-year terms. The estimated commitments under these contracts as of December 31, 2016, were

$91,519 in 2017, $79,401 in 2018, $62,464 in 2019, and $61,197 in 2020.

A consent decree (CD) between the Cooperative, the EPA, and the Sierra Club entered by the U.S. District Court in 2012 was modified in 2014. The CD requires the Cooperative to spend $5,000 on environmental mitigation projects within five years of EPA's April 2013 approval of the projects and includes participation in major solar projects. The Cooperative reflected the obligation of this requirement in deferred credits. During 2015, the remaining

$3,644 obligation for environmental mitigation projects was reduced by $1,434 spent on approved solar and other projects. During 2016, the remaining $2,210 obligation for environmental mitigation projects was reduced by $1,441 spent on approved solar and other projects. The estimated $769 cost for 2017 solar and other projects participation is included in accrued expenses.

The Cooperative has been named as a defendant in various lawsuits and claims arising in the normal course of business. Although the outcome of these matters cannot be determined at the present time, management and legal counsel believe these actions can be successfully defended or resolved without a material effect on the consolidated financial position, results of operations or cash flows of the Cooperative.

11. EMPLOYEE BENEFITS Multiemployer Defined-Benefit Pension Plan-Pension benefits for substantially all employees are provided through participation in the National Rural Electric Cooperative Association (NRECA) Retirement Security Plan ("RS Plan"). This is a defined benefit pension plari qualified under Section 401 and tax-exempt under Section 501(a) of the Internal Revenue Code. Pension benefits are funded in accordance with the provisions of the RS Plan and are based on salaries, as defined, of each participant. The Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendment Act of 1980, imposes certain liabilities on employers who are contributors to multiemployer plans in the event of a plan termination or an employer's withdrawal. These plans have not been terminated, nor has the Cooperative undertaken any plans to withdraw from participation. Since the RS Plan is a multiemployer plan for accounting purposes, all plan assets are available to pay benefits of any plan participant. Separate asset accounts are not maintained for participating employers. This means that assets contributed by one employer may be used to provide benefits to employees of other participating employers.

The Cooperative may be contingently liable for its share of the RS Plans' unfunded vested liabilities.

The Cooperative's contributions to the RS Plan in 2016 and 2015 represented less than 5%

of the total contributions made to the plan by all participating employers. In 2013, the Cooperative made a voluntary prepayment of $26,899 to this plan to reduce future contribution amounts. Expense for this pension plan was $11,071 in 2016 and $10,402 in 2015. The 2016 expense includes contributions to the plan of $8,381 and $2,690 of prepayment amortization. The 2015 expense includes contributions to the plari of $7,712 and $2,690 of prepayment amortization. There have been no significant changes that affect the comparability of 2016 and 2015 contributions.

In the RS Plan, a "zone status" determination is not required, and therefore not determined, under the Pension Protection Act (PPA) of 2006. In addition, the accumulated benefit obligations and plan assets are not determined or allocated separately by individual employers. In total, the RS Plan was over 80% funded on both January 1, 2016 and 2015, based on the PPA funding target and PPA actuarial value of assets on those dates.

Because the provisions of the PPA do not apply to the RS Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the plan and may change as a result of plan experience.

Postretirement Health Insurance Obligation-Certain employees of the Cooperative retiring at or after age 55 are eligible to participate in a postretirement health care plan through age 65. Eligible dependents of the retired Cooperative employees are also eligible to participate in this plan through age 65. Retirees pay 100% of the premium amount for this coverage. The premium is based upon the combined medical claims experiences of all active employees and retirees. If premiums were determined based upon the medical claims experience of retirees only, the resulting premium for retirees would be higher. The difference between the premium paid by retirees and the potential actual premium amount is the basis for the postretirement benefit obligation. The Cooperative uses a December 31 measurement date for its plan. The postretirement health care plan is unfunded.

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The accumulated postretirement benefit obligation (APBO) and the amounts recognized in the consolidated financial statements as of and for. the years ended December 31, 2016 and 2015, are as follows:

2016 2015 Amount recognized in the consolidated balance sheets:

Total accrued qualified and nonqualified benefit obligation $ 4,956 $ 4,744 Less current portion included in accrued expenses-other (287) (262)

Long-term portion $ 4,669 $ 4,482 Change in benefit obligation:

APBO-beginning of year $ 4,744 $ 4,330 Service cost 248 215 Interest cost 174 146 Actuarial loss (107) 44 Participant contributions 381 430 Benefits paid (484) (421)

APBO-end of year $ 4,956 $ 4,744 Funded status of plan-December 31 $(4,956) $(4,744)

Accrued postretirement health insurance obligations recorded at year-end $ 4,956 $ 4,744 Change in plan assets:

Fair value of plan assets-beginning of year $ - $ -

Employer contribution (484) (421)

Benefits paid 484 421 Fair value of plan assets-end of year $ - $ -

Change in accumulated other comprehensive income:

Net income at prior measurement date $ 2,415 $ 2,719 Actuarial assumption changes 107 (44)

Recognition in expense:

Amortization of prior service cost (102) (102)

Amortization of unrecognized actuarial gain (131) (158)

Accumulated other comprehensive income $ 2,289 $ 2,415 Components of net periodic postretirement benefit cost:

Service cost-benefits attributed to service during the year $ 248 $ 215 Interest cost on accrued postretirement health insurance obligation 174 146 Amortization of prior service cost (102) (102)

Amortization of unrecognized actuarial gain (131) (158)

Net periodic postretirement benefit expense $ 189 $ 101 Employer cash contributions expected to be made to the plan during the fiscal year ending December 31, 2017, is $288. The amount of accumulated other comprehensive income expected to be recognized during the fiscal year ending December 31, 2017, is an actuarial gain of $127 and amortization of prior service cost of $102.

For measurement purposes, a 3.64% and 3.77% discount rate was assumed for 2016 and 2015, respectively, to determine net periodic benefit cost. The 2016 and 2015 annual health care cost increase assumed is 6.90% and 7.00%, respectively, decreasing gradually to 4.94% for 2040 and thereafter. A one percentage point increase in the assumed health care cost trend rates would increase the total of service and interest cost components by

$67 and the end-of-year APBO by $499. A one percentage point decrease in the assumed health care cost trend rates would decrease the total of service and interest cost components by $55 and the end-of-year APBO by $431.

Estimated future benefit payments from the plan as of December 31, 2016, are as follows:

Years Ending December 31 2017 $ 288 2018 319 2019 360 2020 374 2021 355 2022-2026 1,738 Defined-Contribution Plan-Dairyland has a qualified tax-deferred savings plan for eligible employees. Eligible participants may make pretax contributions, as defined, with the Cooperative matching up to 2.5% of the participants' annual compensation.

Contributions to this plan by the Cooperative were $1,098 and $1,043 for 2016 and 2015, respectively.

Accrued Sick Leave Benefit-Certain employees are eligible to receive amounts at the time of retirement related to a discontinued sick leave policy. Eligible employees will be paid for a fixed number of sick leave hours at the wage rate in effect at retirement. The total liability was $956 and $1,091 as of December 31, 2016 and 2015, respectively. The cost for this sick leave benefit was $30 in 2016 and $23 in 2015.

Other Plans-The Cooperative offers key employees deferred compensation plans available through NRECA. The plans permit qualifying employees to defer a portion of their salary until future years. The accumulated deferred compensation balance is not available to employees until termination, retirement or death.

All amounts of compensation deferred under the plans and all income attributable to those amounts (until paid or made available to the employee or other beneficiary) are solely the property and rights of the Cooperative (not restricted to the payment of benefits under the plan), subject only to the claim of general creditors. Participants' rights under the plans are equal to those of general creditors of the Cooperative in an amount equal to the fair market value of the deferred account for each participant. The related assets and liabilities, totaling $1,678 and $1,512 as of December 31, 2016 and 2015, respectively, are reported at contract value, which approximates fair value.

The Cooperative also provides employees with medical insurance coverage, vision and dental insurance coverage, short-term and long-term disability, and life insurance, which are funded by employer and employee contributions. The Cooperative's costs related to these benefits were $9,077 and $8,238 for 2016 and 2015, respectively. The liability for these plans of $848 and $738 as of December 31, 2016 and 2015, respectively, are recorded in accrued expenses.

12. RELATED-PARTY TRANSACTIONS The Cooperative provides electric and other services to its class A members. The Cooperative received revenue of $351,491 and $344,290 in 2016 and 2015, respectively, for these services. The Cooperative has accounts receivable from its class A members of

$34,420 and $32,338 as of December 31, 2016 and 2015, respectively.

The Cooperative has advances from class A members of $13,274 and $10,758 as of December 31, 2016 and 2015, respectively, related to the prepayment program. Class A members have the option of paying their electric bill in advance, and in turn, the Cooperative pays the members' interest income. The Cooperative's interest expense related to the prepayment program was $111 and $103 as of December 31, 2016 and 2015, respectively.

The Cooperative has interest-bearing loan receivables from class A members of $246 and

$463 as of December 31, 2016 and 2015, respectively. These loan receivables, which are recorded as part of other assets, are related to the economic development program, wherein class A members can borrow funds from the Cooperative, which the members, in turn, loan to economic development projects in their service territories. These loans are typically repaid to the Cooperative over 10 years. The Cooperative recorded interest income related to the economic development program of $16 and $21 as of December 31, 2016 and 2015, respectively.

13. LONG-TERM POWER AGREEMENTS During 2015, the Cooperative and GRE reached settlement terms amending a power agreement which shared costs and benefits of the Cooperative owned 345-megawatt

• coal-fired generating unit ("Genoa Station #3") located in Genoa, Wisconsin. The settlement terms allowe.d GRE to end its purchase of power and energy under the agreement as of June 1, 2015, upon prepayment by GRE of $83,543 for certain obligations under the agreement. GRE is no longer entitled to any output from the unit. GRE will remain responsible for its share of eventual decommissioning costs and of any liability for disposal of coal combustion byproducts. The transaction received required approval from RUS during 2015.

The prepayment by GRE was recorded in deferred credits and is being recognized into operating revenues on a straight-line basis through 2029, the approximate time frame over which the prepayment amounts would have been billed. The amounts recognized as revenue were $5,729 and $3,342 during 2016 and 2015, respectively. Energy charges to GRE under the original agreement were $17,411 during 2015. Advances from GRE for required deposits under the original agreement were refunded as part of the settlement terms.

14. ASSET RETIREMENT OBLIGATIONS An asset retirement obligation (ARO) is the result of legal or contractual obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, or development .and/or the normal operation of a long-lived asset. The Cooperative determines these obligations based on an estimated asset retirement cost adjusted for inflation and projected to the estimated settlement dates and discounted using a credit-adjusted risk-free interest rate. Upon initial recognition of a liability for ARO, the Cooperative capitalizes the asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. The Cooperative allocates that asset retirement cost to expense using the straight-line method over the remaining useful life of the related long-lived asset. The accretion of the obligation is recognized over time up to the settlement date. Any future change in estimate will be recognized as an increase or a decrease in the carrying amount of the liability for an ARO and the related asset retirement cost capitalized as part of the carrying amount of the related long-lived asset.

The Cooperative determined that it has AROs related to future removal and disposal of asbestos at its power plants. There are no assets legally restricted for purpose of settling the ARO related to future removal and disposal .of asbestos. This ARO is recorded in other noncurrent liabilities in the consolidated balance sheets.

The Cooperative has established a decommissioning trust to accumulate the estimated amounts necessary to decommission a nuclear power plant that the Cooperative formerly operated and the related Independent Spent Fuel Storage Installation (ISFSI). The assets of this trust in the amount of $74,343 and $94,676 as of December 31, 2016 and 2015, respectively, are outside the Cooperative's administrative control and are available solely to satisfy the future costs of decommissioning.

Nuclear decommissioning and other asset retirement obligations as of December 31, 2016 and 2015, are as follows: ,

Nuclear Other Total Balance-December 31, 2014 $ 87,936 $ 4,370 $ 92,306 Accretion in ARO 16 16 Increase (decrease) in estimated obligation 3,769 4,730 8,499 Incurred costs on projects (3,591) (3,591)

Balance-December 31, 2015 88,114 9,116 97,230

• Accretion in ARO 33 33 Increase (decrease) in estimated obligation (2,444) (2,444)

Incurred costs on projects

• j (11,327) (2,112) (13,439)

Balance-December 31, 2016 $ 741343 $ 71037 $ 811380 The Cooperative did not record a conditional ARO related to the dismantlement of the dam and drainage reservoir for the hydro generation plant at Flambeau, the restoration of land to preexisting condition at Genoa Station #3 site related to the land rights permit, and the removal of transmission lines in various corridors, because the Cooperative does not have sufficient information to estimate the fair value of the ARO.

15. NUCLEAR REACTOR License-The La Crosse Boiling Water Nuclear Reactor (LACBWR) was voluntarily removed from service by the Cooperative effective April 30, 1987. The intent was to terminate operation of the reactor, and a possession-only license was obtained from the Nuclear Regulatory Commission (NRC) in August 1987. LACBWR will remain in safe storage status (SAFSTOR) until the final stage of decommissioning of LACBWR, involving dismantlement and decontamination, can be completed. In May 2016, the NRC approved transfer of the license to La CrosseSolutions LLC (Solutions), a subsidiary of EnergySolutions LLC.

Solutions will temporarily hold the license and assumes responsibility for the decommissioning of the site, as described below. The license will revert back to the Cooperative following completion of decommissioning activities. While Solutions undertakes decommissioning, the Cooperative retains a license for its continued ownership of the spent fuel.

Nuclear Waste Policy Act of 1982 (NWPA)-Under the NWPA, the United States government is responsible for the storage and disposal of spent nuclear fuel removed from nuclear reactors. By statute and under contract, the United States government was to have begun accepting spent fuel in January 1998, but has not yet licensed and established a repository. The Cooperative filed an initial breach of contract damages claim against the United States government in the United States Court of Federal Claims to recover its costs generally incurred after 1998 through 2006 related to spent fuel remaining at LACBWR. In January 2013, the Cooperative received a damages award payment of $37,659 from the government for this claim. The Cooperative filed a second contract damages claim in December 2012 to recover its costs generally incurred from 2007 through 2012. The Cooperative and the government agreed to settle the second claim in October 2016.

Settlement proceeds of $73,500 were received from the government in November 2016.

Subsequent damages claims will be filed to recover the continuing costs arising from the presence of the spent fuel.

For 2016, at the direction of the Board of Directors, the settlement proceeds of $73,500 were recorded as a regulatory liability due the Class A members. The nuclear related regulatory asset of $16,700 and deferred charges for nuclear related litigation and plant costs of $9,164 were recovered from the regulatory liability as these amounts had not been collected in rates yet. The remaining net amount of $47,636 was refunded to Class A members in February 2017 and is included in accrued expenses in Current Liabilities as of December 31, 2016. For 2015, none of the second claim award damages are reflected in the consolidated balance sheets or consolidated statements of revenues, expenses and comprehensive income.

ISFSI-The Cooperative completed the temporary dry storage facility project located on the LACBWR site and completed the move of the LACBWR spent nuclear fuel to this ISFSI facility in September 2012. The spent nuclear fuel will remain at the ISFSI until it is able to be transferred to the government. Annual ISFSI costs are recorded on an as incurred basis and incorporated into the annual budget and rate making process.

Decommissioning-The Solutions decommissioning plan anticipates completion of decommissioning LACBWR, not including the ISFSI, by the end of 2019. The estimated costs of decommissioning the nuclear generating facility are based on the Solutions cost study and decommissioning plan filed with the NRC as part of the license transfer. Costs incurred for decommissioning projects are charged against the decommissioning liability.

As costs are incurred, Solutions submits requests for withdrawals to the Cooperative for release of funds from the nuclear decommissioning trust.

Other-The Cooperative's policy is to provide additional funding of the nuclear decommissioning trust, as necessary, through rates and with future earnings, to ensure that the trust will be sufficient to cover final decommissioning expenses. The annual decommissioning expense, SAFSTOR and ISFSI costs are recovered from the class A members. Earnings on the nuclear decommissioning funds and the equivalent provision for nuclear decommissioning costs are recorded as nonoperating margins, since the plant is no longer in service.