ML20248H471

Independent Auditor'S Report and Consolidated Financial Statements December 31, 2019 and 2018

ML20248H471
Person / Time
Site:	Susquehanna
Issue date:	08/19/2020
From:	Allegheny Electric Cooperative
To:	Office of Nuclear Reactor Regulation
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ML20248H469	List: ML20248H470 ML20248H471
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Download: ML20248H471 (36)

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ENCLOSURE3 Allegheny Electric c:ooperative,_ Inc.

Independent Auditor's Report and Cons:olida,t¢d Financial Stat~m~nt$

Dec,eml:>~r 31; .2019-and 2018

".1**:***.1**

. .**.**.**.:_:*.*.D***_

• cPAs* &- Advisors

Allegheny Electric Cooperative, Inc.

December 31, 2019,and 2018 Contents Independent.Auditor's* Report ............................:'.*************************************************************,************* 1 Consolidated Financial Statements Bah1nc.e Sheets ....................................................................*................................................................ 3 Statements* of l\1argin ............................................................................ '. ............................................. 4 Statements of Comprehensive Margin (Loss) .................................................................................... 5 Statements ofMembers' Equities ....................................................................................................... 6 Statements of Cash Flows ..*.. ,.*............................................................................................................. 7 Notes to Financial Statements ............................................................................................................ 8

BKD CPAs & Advisors Two Leadership Square South Tower I 211 N. Robinson Avenue, Suite 600 I Oklahoma City, OK 73102-9421 405.606.2580 I Fa.x 405 *.600.97991 bkd.com Independent Auditor's Report Board.of Directors Allegheny Electric Cooperative, Inc.

Harrisburg, Pennsylvania We have audited the accompanying consolidated :financial statements of Allegheny Electric.Cooperative,

.Inc. (the Cooperative), which comprise the consolidated balance sheets* as of December 31, 2019 and 2018, and.the related consolidaj:ed statements ofmargin, compreheJ.lSive nuugin (loss), members' equities and cash flows for the years then ended, and the related notes to the consolidated :financial statements.

Mcmagement's Respom;ibility fqrthe Finam::ia/St;;,tements Management is responsible fot the preparation an.d :fui,r presentation of these consoHdateci :fin811cial statements in accordance with accounting principles generally accepted in the United States .of America; this inclµdes the design, :implementation and iruµntenance ofintemal control relevant to the preparation and fair presentation of consolioated :financial statements that are free from material.misstatement, whether due tofraud or error.

Auditor's Responsibility

.Our responsibility is to express an opinion on these consolidated :financial.statements based onour audits.

We conducted our audits in accordance with auditing standards generally accepted inthe United States of Ain.erica Those st8Ildards require that we plan 8Ild perform the µudit tQ qbtain reasonable assµrance about whether the consolidated financial statemenis are free from material:*misstatement.

An audit involves performing .procedures to obt~ audit evidence about the amollllts and disclosures in the* consolidated :financial.statements. The procedures selected depend on the auditor's judgment, includµJg*the assessment oftlie risks ofm~terial misstatement of the consolidated :financial statements, whether dueto fraud or error. In maldng those risk assessments, the auditor considers internal control relevant to the entity'_s prepat~on and fair presentatiqn oHhe. c91IB,olidated :firunicial statements.in or<ier to (lesign audit procedures that are appropriate in the circumstances, but not. for the pmpose of expressing an opinion on the**effectiveness of the.entity's internal control. Accordingiy;we express no such opinion.

An audit also.includes e:valuating the appropriateness ofaccounting policies used and the re~onableness of significant accounting estimates made .by management, as wellas evaluating the overail 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.

Board of Directors Allegheny Electric Cooperative, Inc.

Page2 Opinion Iri our opinion, the consolidated :financial statements.referred to above present fairly, in all material respects~ the financial position of the Cooperative as.ofDece:mber31, 2019 and20i~, andtheresults of its operations and its.cash flows for the years then ended maccordance with accounting principles gerterallyacceptedin the United States of America.

Emphasis of Matters As discussed inNoieJ to the* consolidated financial statements, in 2019; the Cooperative adopted Accounting Standards Update (ASU) 2014-09; Revenue.from Contracts with Customers .(Topic, 606), and ASU 2016-0 l; Financial, Tnstrliments.:_CJverali (Subtopic 825-1 OX* Rei:ognitiOn.imdMea.mtement of Fi,nanc;al ~s~.t~ and FinancialLiab.#ilies. Qur opinion is 11ot modified wit:hre~pect fo the_se matters.

Oklahoma City; Oklahoma April 3, .202Q

Allegheny Electric Cooperative, Inc.

Consolidated Balance. Sheets December 31, .2019 and 2018 (In Thousands)

Assets 2019 2018 Electric Utility Plant, at Cost In service (seeNote2)

Less accumµlated depreciation Construction work in progress Nuclear fuel in process (see Notes 1 and 3)

Net el~_ctric 4tility plant (see Motes 1, 2 arid 3)

Investments and Other Assets Investments in.associated organizations (see Note. 4)

Nuclear Decommissioning Tiust(see Notes 1 and 5)

Pebt se_curities, available for sale, _at f!!.ir value Equity securities, available for sale -2018~ at fair value N~pro~,~~-~tcost (net of accumulated :~epreciation of

~n~ 2019 and 2018, respectively)

.Assets.cifconsolidateci variable interest entity

.. 1111 Prepaid pension expense (see Notes 12 and 14)

Financial transmission rights (see Note 6)

___I_ _I Other noncurreJit assets Total investments and other assets Current Assets Cash and cash equivalimts Investments (seeNofes 1 and 4)

Accountsr:eceivable, members (seeNote 1)

Accounts receivable, affiliated organization Other receivables Inventories (see Note 1 )

Other current assets Financial transmission rights (see Note 6)

Assets of consolidated variable interest entity

_J_J Cash and ~ash equivalents Accounts receivable, affiliated organization Othf!r receivables Other current assets Total current assets Deferred Charges (see Note 7) ~

Total assets ~ ~

SeeNotes to Consolidated Financial Statements

Members' Equities and Liabilities 2019 2018 Members' Equities (see Note 1)

Membership fees $ $

Patronage capital Donated capital Dnrestrictednet assets Retained earnings Members' equities

~

Accumulated other comprehensive margin Total equities Asset Retirement Obligation (see Note 8)

Long-TermDebt(seeNote 9)

Advance from Affiliated Organization (seeNote 12)

Current Liabilities Current installments of long::term debt Accounts payable and accrued expenses Colla.teral from counterparties (seeNote I)

Current portion of f~ncial transmission rtghts deferred credits(~ee Note 16)

Liabilities of consolidated variable interest entity * *

~~

Accounts payable and accrued expenses Accrt1~d postretirement bem;fitc,ost (~e Note 13)

Accounts payable, affiliated organization Total current liabilities Deferred Credits Deferred credits (see Note 16)

Total members' equities and liabilities ---- ----

~ ~

3

Allegheny Electric Cooperative, *inc.

Consolidated Statements of Mar9in Years Ended December 31, 2019 and 2018 (In Thousands) 2019 2018 Operating Revenues ~

Operating Expenses Operatiom; Purchased capacity and energy costs Transmission Operation Maintenance Production Operation Maintenance Fuel Depreciation Airtprtization of capital retirement asset Administrative and genen1l Property and other taxes Total operating expenses before interest Operati~ Margin Before Interest Expense Interest Expense Operating Loss Nonoperatiilg Margins Nonoperating rental income Nonoperating rental expense Interest income Settlement proceec:ls Capital .credits and other income Total np11operating margins

~etMargin See Notes to Consolidated Financial Statements 4

Allegheny Electric Cooperative, Inc.

Consolidated Statements of Comprehensive Margin (Loss)

Years Ended December 31, 2019. and 2()18 (In Thousands) 2019 2018

~ ~

<l' ....

Net Margin a,$* ....

Other Comprehensive Margin (Loss)

Change in postretirement benefit plan Unrealized appreciation (depreciation) in investments

• Total other comprehensive margin (loss)

Comprehensive Margin (Loss)

SeeNotes to Consolidated Financial Statements 5

• Alle.gheny Electric Cooperative, Inc.

Consolidated -Statements of Members' Equities Years Ended Dec;eml)er 31, 2.019 and 2018 (In Thousands)

Accumulated Total Other Membership Donated Patronage Unrestricted Retained Members' Comprehensive Total Fees Caeital Caeital Net Assets Earnings Eguities Margin {Loss} Eguities Balance, January 1, 2018 $ I $

Patronage capital retirement Patronage capital assignment - -

Net margin -

Other comprehensive loss -

I Balam:e, ])ecember 31, 2018 Change in accounting principle (see Noie 1)

Patronage Capital retirement ~ -

Patronage capital assignrnent -

Net"margin -

Other comprehensive margin ~

Balance, December 31, 2019 $

• ~ $ C ..!__lllllll ~ ~ ~

See Notes to Consolidated Financial Statements

Allegheny Electric Cooperative, ln*c.

Co.ns.olidated Statements of Cash Flows Years Ended December 31, 2019 and 2018 (In Thousands) 2019 2018 Operating Activities

'Netniargin Items notrequiring (providing) cash Depreciation and fuel amortization Accretion of asset retirement obligation Deferr:ed income taxes

• Capital. credits Amortization of debt conversion fees Other.:than-teniporary losses Changes in.

Accounts receivable, members Other receivables Inventories Derivative investments Prepaid pension expense _

Other current andnoncurrehtassets.

Accounts payable and accrued expenses Accounts receivable, affiliated organization Advance froni affiliauid organi7iltion Financial transmission rights Accrued postretirement benefit-cost Other liabilities and deferreds .

Net cash provided by operating activities Investing.Activities Additions to electric utility plant and norrutility property, net Proceeds from investments

• Purchase of investments Net cash used in investing activities.

Financing Ac:tivities PrincipaLpayments on long-term debt Patronage capital retirement Net c~h used in financing activities Net Increase in Cash and:Cash Equivalents Cash anti Ca.sh Equivalents,Beginning of Year Cash and Cash Equivalents, End of Year ~

Supplemental Cash Flows Information Interest paid 1111 $

See Notes to Consolidated Financiaf.Statements 7

Allegheny Electric Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2019 and 2018 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Allegheny Electric Cooperative, Inc. (the Cooperatiye) is an electric cooperative corporation established under the laws of the Commonwealth of Pennsylvania. The Cooperative has _entered into wholesale power contracts with each of its 14 member cooperatives; which extend through 2050. The Cooperative either.:firuinces or obtains :financing for its outstanding debt with the National Rural Utilities Cooperative Finance. Corporation (NRUCFC) or CoBank, ACB (CoBank).

The Cooperative is a generation and tran~missioncooperative. The member cooperatives' service areas are primarily rural areas throughout much of Pennsylvania and a portion of New Jersey. The Cooperative's primary operating asset is its 10% undivided interest in the Susquehanna Steam Electric Station (SSES), a 2,600-megawatt (MW) two-unit nuclear power plant co-owned by Susquehanna Nuclear, LLC, a subsidiaiyofTaienEnetgyCorporation (Talen). Susquehanna Nuclear, LLC is the sole operator of SSE_S.

Tht: Board of Directors of the Cooperative, elected by its members, has full authority to establish electric rates for its member cooperatives. Rates are established on.a cost of servi_ce basis. The Cooperative' s .Board .of Directors has established a deferred revenue account to offset future increases in power supply costs.

Principles of Consolidation The accompanying consolidated :financial statements include the accounts of the Cooperative and a variable interest entity (VIE), Continental Electric Cooperative Services, Inc. (CCS), of which the Cooperative has determined it is the primary beneficiary. All significant intercompany accounts and transactions, have been eliminated in consolidation.

Variable Interest Entity A legal entity is referred to as a VIE if any of the following conditions exist: 1) the total equity investment at risk is insufficient to permit thelegal entity to finance its activities without additional subordinated financial support from other parties, or 2) the entity has equity investors who cannot make significant decisions about the entity's operations or who do not absorb their proportionate share of the expected losses or receive the expected returns of the entity.

A VIE' s primacy beneficiary is the entity that has the power to direct the VIE' s significant activities and has an obligation to absorb losses.or the right to receive benefits that could be poteri~iaily *significant t_o .the VIE.

A VIE must be consolidated by the Cooperative if*it is deemed to be the primacy beneficiary of the VIE.

All facts and circumstances are taken into consideration when determining whether the Cooperative has variable interests that would deem it the primacy beneficiary and, therefore, require consolidation of the related VIE or otherwise rise to the level where.disclosure would 8

Allegheny Electric Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2019-and *201s provide useful information to the users of the Cpopetative 'S consolidated ftnailcial shttements.. Iii many cases, it is quitlitatively ckarwhether the Cooperative has the power to directth~ activities significant to the VIE, The Coopera,tive has. the unilateral power to clirect the activities significant to the VIE andis obligated to absorb significant losses ofor has a rightto receive *significant benefits from the VIE. In other cases, a more .detailed qualitative analysis and possibly a quantitative analysis are required to make such a determination:

The Cooperative. monitors the consolidatedVIE to detennine if any events have occurred that could cause it to n:o longer be a VIE. The Cooperative're-evaluates whether it is the primary

. beneficiary ofa VIE:on an ongoing basi!!. A previo:usly consolidated VIE is.dec.otisolidated when the Cooperative ceases to be the primary beneficiary orthe entity is no longer a VIE.

CCS is .considered to be a VIE.and the. Cooperative iS determined to be.the primary beneficiary .of C,CS. As such, the assets, liabilities and.results ofCCS' operations have been consolidated into these financial statements.

Basis of Accounting The Cooperative substantially maintains its accounting records in accordance with the Federal Energy Regulatory Commission's (FERC) uniform system of accounts as.modified and adopted by the U.S. Department of Agriculture Rural Utilities Servi.ce (RUS). .

In accordance,with generally accepted accounting principles (GAAP) and FERC guidelines, the Cooperative also maintains its accounts in accordance wi~IJ.. Finan.cial. Accounting Stanruu;d!! Board (FASB) Accounting Standards Codificatiori (ASC) 980, RegulatedOpera(ions.

Deregulation On a regular basis,. the Cooperative re-evaluates itS application of ASC 980 and ASC 980-20, Discontinuation ofRate-Regulated Accounting. The Cooperative has detenninedregulatory assets and liabilities should continue to be accounted for under the provisions of ASC 980 because it is reasonable to assume the Cooperative will continue to be able to charge and collect its cost of servic:e-based rate!!.

Use of Estimates The preparation of consolidated financial statements in confonnity with GAAP requires management to make estimates and assumptions that affect .the reported .amounts of assets and liabilities and disclosure ofcontingent ass.ets and liabilities at the date of the cotisolidat.ed financial statements, and.the reported amounts of revenues and experiSes:during.the reporting period. Actual results could differ from those estimates.

9

Allegheny Electric Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2019 and 2018 Electric Utility Plant Electric. utility plant is carried at cost. Depreciation of electric.utility plant is provided over the.

estimated useful lives of the respective assets on a straight-line basis, exceptfor nuclear fuel, as follows:

Nuclear utility plant Production

• Unit #1 and Unit #2 remaining license life extended to 2042 and 2044, respectively

• Transmission 10-30 years General plant 3-IOyears Nuclear fuel Uniq; of heat production Non-nuclear utility plant 3-30 years Hydroelectric production plant l0-10years Maintenance* and repairs of property and replacements and renewals of items determined to be less than units of property are charged to expense. Replacements and rertewab; of items ¢ortsidered to be units of property are charged to the property accounts. At the time properties are disposed of, the original cost, plus cost of removal less salvage of such property, is charged to accumulated depreciation.

Nonutility.Property Nonutility property acquisitions are stated. at costless accumulated depreciation and amortization.

Depreciation and amortization is charged to expense on a straight-line basis over the estimated useful life of each asset.

The estimated useful lives of nonutility property range from 3 to 50 years.

Nuclear Fuel Nuclear fuel is charged to fuel expense based.on the quantity of heat produced for electric generation. Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy (DOE) is responsible for the permanent storage and disposal ofspent nuclear fuel removed :fromnuclear reactors. The Cooperative c11rrently pays Talenforits portion ofDOE.feesfot such future disposal services. In 2011, Susquehanna Nuclear, LLC entered into a settlement agreement with the DOE relating to a lawsuit against the DOE for partialbreach ofthe standard contract for disposal of spent nuclear fuel. The settlement includes reimbursement of certain costs to store spent tmcleat fuel atSSES. In2019, Susquehanna Nuclear, LLC entered into an amendment to the agreement to amend annual fees and extend the agreement for an additional five years to the end of 2024. The Cooperativ.e receives. l~eimbursement. During 2019 and 2018, the Cooperative recorded settlement proceeds of ~ a n d -respectively, related to the permanent storage and disposal of spent nu~lear fuel as :reported in nonoperatirtg truirgins .in the>accompanying consolidated statements of margin.

10

Allegheny Electric Cooperative, Inc.

Notes to Consolidated Financial Statem~nts DecE!mber ;J1, 2Q19 and 2018 Equity Investments The Cooperative.measures equity securities at fair value with changes recognized in net margin.

With the adqption of ASU 2016-01, the Cooperative has implemented deferral accounting for all changes in unrealized gains and losses . .Under ASC 980, the Cooperative has electedto defer changes to all unrealized gains andlosses of equity investments with readily determined fair market values. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

the Cooperative considers patronage investments in other organizations to be equity invc:stments without a rea~ily determinable fair value. The Cooperative measures equity investments without a readily determinable fair value at cost, .minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or a similar investment.

Debt Investments Debt.securities held by the Cooperative generally are classified and recorded in the accompanying consolidated financial statements as available-for-sale securities and are held at amortized cost.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gauis and losses _on the sale of securities ,are recorded on the trade date and are detennined using the specific identification method.

Investments in Associated Organizations The Cooperative has equity ownership in the form of patronage capital through various lenders and other organizations (see Note 4). Patronage capital equity is increased as patronage is allocated to the Cooperative and decreased as patronage is retired and cash is received. These investments are considered equity securitie.s without readily determinable fair values and are accounted for at. cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. No impairment or observable price changes were recorded during 2019 and 2018.

Cash and Cash Equivalents Cash equivalents consist of commercial paper, select notes and money market.funds; Th~ Cooperative considers all highly liquid investments with an original maturity ofthree months or less when purchased to be cash equivalents. Cash equivalerits are carried at cost.

At December 3 2019

- the 1 Cooperative's cash accounts excee<Jed federally insured limits by approximately . .

The Cooperative 's cash and,investments are in a variety of financial instruments. The related values, as presented in the accompanying consolidated financial statements, are subject to various market fluctuations,.whichinclude changes in the equitymarkets, interest:rate environment and general economic conditions. The Cooperative 's credit losses have historically been minimal and within management's expectations.

11

Allegheny Electric Cooperative, Inc.

Notes to Consolidated Financial Statements December31, 201EJ and 2018 Ac:c.ounts Receivable Accounts receivable are stated .at the amount of consideration from customers of which the Cooperative has an unconditional right to receive plus any accrued and unpaid interest. An allowance for doubtful accounts has not been recorded because all accounts receivable are considered fully collectible at December 31, 2019 and 2018. At December 31,2019 and 2018, three members combined for 38% and 40% of accounts receivable, respectively.

Derivatives Derivatives are recognized as assets and liabilit1es on the accompanying consolidated balance sheets and are measured at fair value. For exchange-traded contracts, fair value is based on quoted market prices. For nonexchahge-traded contracts, fair value is bas*ed on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value.may require significant management judgment or estimation.

Inventories Purchases of spare parts under inventory controi are included in an inventory account and thert charged to the appropriate capital or expense accounts when the parts are used or consumed.

Inventories are carried at the lower of net realizable value or cost. Costs of inventories are determined usingthe average cost method.

Patronage Capital Current and future margins; excluding earnings from the NuclearDecommissioning Trust(NDT),

will be assigned as patronage capital.

Collateral. from Counterparties The Cooperative has entered into agreements with third parties regarding purchased power pricing and settles monthly with these counteiparties resulting in deposits niade to the *cooperative in advance of settlement. Collateral requirements are determined by a third party.

Income Taxes The Cooperative accounts for income taxes in accordance with income tax accounting guidance (ASC740, Income Taxes). The*incometax accounting guidance results in two components of income tax expense: current and deferred. Currentincome tax expense reflects taxes to be paid or refunded for the current period by appiyirtg the provisions of the enacted tax law to the taxabie income or excess of deductions over revenues. The Cooperative determines deferred income taxes usingthe liability (or balance sheet) method. Under this method, the net deferred ta,'I:. as:set or liability is based on the tax effects of the differences between the book and tax bases of asse.ts and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred.tax ass.ets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance it; based on the weight 12

Allegheny Electric Cooperative, Inc.

Notes to-Consolidated Financial Statements De~E!mber31, 2019 and 2()18 of evidence available, it is more likely than not that some portion or all .of a defi.~11'.ed tax a_sset will not be realized.

The Cooperative would recognize interest arid perutlties on income taxes, if any, .as a component of income tax expense.

Revenue from Contracts with Cu$tomers The majority of the Cooperative 's revenues are earned from the sale of electric power to members pursuantto iong-term wholesale power contracts. The Cooperative also has non-member-revenue derived from long-tenn. power contracts and the sale of '

renewable .energy certificates.

Long,.Term Power Contracts Loiig-tenn power contracts include wholesale power contracts with members and sales into PJ.M Interconnection, LLC (l'JM), a regionaitransmission organization. Customers oflong-termpower contracts simultaneously receive and consume_ the benefits of electric power. Toe Cooperative has a stand-ready obligation to provide power through the term of.the contract andrecognizes revenue over time. The progress toward the completionofperformance obligations is m_easured using the outputmethod, which is based onmortthly meterreadings at member substations.

Bills are calculated monthly based on meter readings and the different components and rat~s as set:

forth in the wholesale power agreements. Payments from customers are received in accordance with each long.,-term contract's terms, which is usually 30 days.

Renewable Energy Credits The Cooperative is allocated renewable energy.credits (REC) from the State of Pennsylvania for cenain hydr9electtj_c-generating as.sets. The Cooperative routinely sell~ .e11ergy credits to customers. The Cooperative recognizes revenue from the sale of RECs when ownership of the REG transfers to the customer, whichis when the REC is assigned to the customer within PJM.

The transactionprice ofRECs is based on prevailing market prices.

Bills to customers are calculated based on the transaction-price and the number of RECs transferred. Payments from customers are receivedin accordance with each contract's terms, which is usually 30 days.

• CCSRevenue CCS primarily earns revenue by providing certaingenetal and adn:iirtistrative services to customers.

The Cooperatiye has elected to utilize the "as-invoiced" practical expedient, which permits the Cooperative to recognize revenue in the. amount to which it has a right to-invoice the customer, as the amount invoiced corresponds directly with the*value*provided .by the.performance obligation as completed to date. Customers are billed monthly and payment is duewithin 30 days.

13

Allegheny Electric Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2019 and 2018 The following tabie ptesenu;.the C9opefative's revenues disaggregated by contract type and customer type during the years endedDecember 31 (in thousands}:

2019 2018 Member Long-tenn power .contracts Non-Member Long-terni power contracts Renewable energy credits and other electric revenues Continental Cooperative Services Other Total .L....111111. _!_111111_

Comprehensive Margin (loss)

Comprehensive margin (loss) consists ofriet margin and other comprehensive margin (loss). Other comprehensive margin (loss) includes change in posti:etirement benefit plan and umealized appreciation (depreciation) in investm,ents.

Impairment ofLong-Lived Assets The Cooperative evaluates the recoverability of the carrying value oflong-lived assets whenever events or circumstances'indicate that carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition ofthe .tssetis less than the carrying *amount of the asset, the

• asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds it.s fair value. No asset impairment was recognized during the years ended December 31, 2019 and 2018.

Change in Accounting Principles Revenue Recognition In 2019, the Cooperative changed its accounting policy on revenue recognition by adopting the provisions of Accounting Standards Update (ASU) 2014-09,Revenuefrom Contracts with Customers (Topic 606), that replaces existing revenue recognition guidance. The new standard requires companies to recognize revenue irt a way that depicts 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 addition, Topic (506 requires disclosures of~he nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

The Cooperative adopted this standard on January 1,.2019, using a modifiedretrospective*approach with the cumulative effect of initially applying the new standard recognized in patronage capital at 14

Allegheny Electric Cooperative, 1n*c.

N9tes to Consolidated Financial Statements Decl!ml,er31, 2019 and 2018 the beginning of the year of_adoption. Comparative prior period ip:formatiori has not been adjusted and continues to be reported in accordance with previous revenue recognition guidance in ASC 605,RevenueRecognition. The Coop~rativehas applied thenewstandard to all contracts not complete at the date of adoption.

For significantfinancing components, the Cooperative elected a practical expedient thatallows an entity to recognize the promised amount of consideration without adjusting for the time value of money if the contract has a duration of one year or less, or ifthe reason the contract extended beyond one year is because the timing of delivery of the product is at the custom:er' s discretion. As the Cooperative.'.s contracts do rtothave significant financing component~, revenue-is not presented on a present value basis.

The Cooper;itive 's adoption of Topic 606 did not result in a material.change to the timin$ of

_revenue recognition.

FinanciaUnstruments In 2019, -the Cooperative changed its accounting policy on financial assets and liabilitie_s by adopting the provisions of ASU 2016-01, Financiallnstruments-Overall (Subtopic 825-,J0):

Recognition and Measurement ofFinancial Assets and Financial Liabilities. The new accounting guidance in ASU 2016-01 tequire;s companies to recognize changes in fair vah1e of ~q'uity investments through net margin. The change was applied thro:ugh a cumula:tive-e:ffe¢tadj:ustment to the current year's beginning patronage capital and, for equity securities without readily determinable fair values, prospectively to equity investments that were held as of the date of 0

adoption. As a resultofthe*adoptiort, the Cooperative reclassified the January 1, 2019, balance of approximately ~ net unrealized gains* and losses from other comprehensive margin to patronage capital.

Note 2: Electric Utility Plant in Service The summary inf<>nnatio11 related to the Goop~ative.'s electric utility plant~ ,service as of December31 is as follows (in thousands):

2019 2018*

Production Transmission (see Note 7)

General plant Nuclear fuel Other Total 15

Allegheny Ele*ctric Cooperative, Inc.

Notes to-Consolidated Financial Statements December31, 201!:I and 2018 N.ote3: Susquehanna.Steam Electric station.

The Cooperative owns a.10% undiyideci interest in SSES. Jalen owns theremaining 90%. Both participants provide their 0"7n :financing. The Cooperative' s portion of SSES' gross assets, which includes electric uti~ervice; coqstructiort an~ rtu_ciear fuelin pro~ess, totaied

• and - a s of December 31, 2019 and 2018, respectively. The Cooperative's share of anticipated costs for ongoing construction and nuclear fuel for.SSE$ is e~timateci to }?e approximately - o v e r the next five years. Ute CoQperatiye receives a portiori of the totaLSSES output equal to its:perceritage of ownership. SSES accounted.for approximately :i9% and 57% ofthe *total kilowatt hours sold to its members by the Cooperative during the years ende_d.December 31, 2019 and 2018,.respectively. The accompanying consolidated balance sheets and statements ofmargin reflecfthe Cooperative's respective undivideci:share of assets, liabtlities and operations associated wtth SSE$;

Note 4: Investments Associated Organizations Investments in associateµ organizations as of December 31 are as follows (in thousands):

2019 2018

.NRUCFC subordinated certificates; bearing interest ofS.OOlo*and:

5.8%, maturing January 31, 2021 and-October 31,2044 NRUCFC patronage capital CoBankpatronage capital Other Total lnves.tmen.ts In 2019, the Cooperative adopted ASU 2016~01, which resulted irt a new-classification and measurement of eqµify sec:urities. See Note 1 for additionaU.nform:ation.

16

Allegheny .Electric Cooperative, Inc.

N9tes to Consolidated Finanpial Statements December 31, 20.19 and 2018 Amounts related. to securities, including amortized cost and approzjmate fair values, along with gross unrealized gains and losses atDecember 31 are as follows (in thousands):

Gross Gross Amortized Unrealized Unre;ilized Impairment*

• ' *

• I Fair Cost Gains Losses Recognized Value 2019 Available-for-'S:ile Securities Investinents Corporate bonds Other notes Total .* $ - ~

=

2018 Available-for-Sale-Securities Investments Corporate bonds Other.notes Stocks(!)

Total (1) Effective January 1, 2019, with the adoption of ASU 2016--01, immaterial equity securities are excluded from the table above as of December 31,- 2019.-

• The amortized costand.fairvalue of available-for-sale securities at December 31,2019, by contractual maturity are.:shown below (in thousands). Expected maturities will differ from

.contractual matu:rities because issuers may have the right to call or prepay obligations with ot without call *or pre*payment penalties.

Amortized Estimated Cost Fair Value Within one year One to five yea11, After five years Total L-1111.. L-1111..

Proceeds from the sales and maturities of available-for,-sale securities were ~ a n d

~ o r t h e years ended December 3 . ~ d 2018; respectively. Gross gains on_

available-for-sale securities o f - a n d ~ o r the years ended December 31, 2019 and 2-018 respect**-vel were realized<<;>n th()se sales. Gross losses ort ayailable-for-~alesecurities ot and or the years ended December 31, 2019 and 2018; respectively, were realized on those sales.

17

Allegheny Electric Cooperative, Inc.

Notes to Consolidated Financial Stateme.nts December31, 2019*and 2018 Note 5: Nuclear Decornmissioning *Trust lrt 2019, the Cooperative adopted ASU,2016-01, which resulted in-a newclassification: and measurement of.equity securities. See Note 1 for additional information.

Amounts related to securities, including amortized cost and approximate fair values, along with gross unrealizeq gaiilS and losses.at December 31 are as follows (in thousands):

Gross Gross Unrealized Unrealized Impairment Fair cost Gains Losses Recognized Value 2019 Available:ror..:sat~ Securiti~s Nuclear decommissioning tnist fund Moneymarket funds $

U.S. govennnent securities C:olJ)Orate bonds Other obligatiOIJS Total available-for-sale secmities Equity Securities Common stock 1111 Total ~ ~.~ =$==- ~

2018 . .

Available-:for-Sale $ecurities Nuclear decommissioningtrustfimd Money'mai'ketfunds $

. U.S, government secmities COlJ)orate.bonds.

~ ~ - $

Other obligations Total debt secmities Common.stock (a)

~ ~ 4=1111 ~ ~

(a) Effective January 1, 2019, with .the adoption of ASU 2016:-01, equity securities are excluded

.*

• from available-for-sale securities inthe table above as ofDecember31,2019.

• Proceeds :from.the sales and maturities of securities were* and*~

years ended December 31, 2019 and 2018, respectively. Gross gains on s e c u ~

and4llllitor th~years ende??ecem-ber 31 20!"9 an~~ectively,_were realized dil those sales. Gross losses _on secunttes of ancl ~ e r e r:eahzec.l on those .sales.

During the years ended De,cember 31, 2019 and 2018, the Cooperative recorded other-than-temporary impairments (QTII) on debt and equity secµritiesiil the amountof . n d -

18

Allegheny Electric c*ooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2019 and 2018 respectively. The cost basis of these investments has been adjusted to reflect the re~ognitiort of these impairments.

• Under ASC 980, the Cooperative has elected to defer these losses ;and pass. them on to memb_ers through the future rate structure. As of December 31, 2019 and 2018, total deferred charges for the NDT OTTI were - a n d - ~ e s p e c t i v e l y . .

Unrealized Gains (Losses) of Equity Securities The portion* of unrealized gains and losses for the period related to equity securities still held at December 31, 2019, is calculated as follows- (in thousands):

Netgains deferred during the period on equity securities Less net realized gains deferred during the period .on equity securities sold during the period Unrealize_d ga:ii:ls-deferred during the period oh equity se_curities still held at the reporting date Note 6: Derivatives and Hedging The Cooperative*does*notengage in speculative derivative transactions;.however, the Cooperative engages in hedging activities that are a natural part of power supply and transmission activities.

The Cooperative.uses hedging irtsttum:ents, irtclucfing forwards, futures, :financial transmission rights (FTR) and options to manage power market price risks. fu addition, reliance on* th~ purchase of energy from other power suppliers expQses the Cooperative to the risk coµnterpartie~ \Yill default. Therefore, an assessment is perforined on ~e creditworthiness of couriterparties ail~ other credit issues related to these purchases, which may require the counterparties to post collateral.

Defaults, however, may still occur. If a default occurs, the Cooperative may be forced to enter into other contractual arrangements or purchase energy in the forward, short"-term or spotmarkets at then'-current market prices that could vaiy from the prices previously agreed upon with the defaulting counterparty. The Cooperative has never had a counterparty default or fail to perform, but past performance is no,guarantee uffuture res_ults.

• Financial Transmission. Rights The Cooperative is issued FTR.s by PJM'. These F1Rs have.beenfourtd tom(:et the ASC 815, Derivatives and Hedging, definition ofa derivative and, therefore, they musthaye special derivative accounting procedures applied to them.

The Cooperative receives an entitlement ofF1Rs. F1Rs are,defined from a "sourqe" node to a "sink node (path) for a specific amountof MWs of electric power. The holder of an.FTR is entitled to receive whole or partial offsets of transmission congestion charges that arise when that specific path is congested. The pmpose of the FIR mechanism is.to. act as a hedge against volatile congestion charges.

• Allegheny Electric Cooperative, Inc.

Notes-to Con.soHdated Financial Statements December31, 2019 and 2018 oil Market values of FIRs are only observable based the clearing prices* of the FTRs ih multi-year, annual, seasonal and monthly auctions. The exp_ected value ofFTRs :fluctuates based on seasonal

~xpectations ofthe supply and demanc:l of energy for each specific path. Significant assumptions and modeling projections are necessary to value FIRs. The expected FTR values are considered in the raie-,-making process *and, therefore, the fair values of FTRs are recognized in the accompanying consolidated balance sheets and are recorded as deferred income or deferredloss under ASC980.

The fair value ofFTRs was a - . . n d - . . s s e t as of December 31, 2019 and 2018, respectively*. * *

(In Thousands).

2019 2018 Fa:ir value ofFTRs $' * $

• Balance sheet locations Current assets Curr.ent assets N oncurrent assets Noncurrent. assets Note 7: Deferred Charges Deferred charges consist ofthe following regulatory assets as of December 31 (in thousands):

• 2019. 2018 Deferred asset plan - NDT investments (see Note 5) $

Deferred transmission asset

• Unamortized.debt conversion fees (see Note 9)

Deferred d~commissioning regulatory asset The Cooperative. has established a decommissioning regulatory account under ASC 980. This account includes the excess (deficiency)ofthe annual accretion of the assetretiremerttobiigatiort over (under) :the annual cash contribution, unrealized and r~alizecl ¢arnings of the NDT. The

. Cooperative monitors this account periodically and will recognize amounts in the accompanying

. consoli<iated i;tatements of margin and*pass amounts through to its members, as necessary, to meet the funding requirements of the NDT. No such amounts were recognized for 2019 and 2018.

During 2016, the Cooperative transferred certain transmission assets to:its members. There was no consideration received from the members for the transfer of these transmission assets; however, the members are now responsible for the care and maintenance.of the assets. At the time of the transfer, these .assets had a net book value o f - This amounthas been deferred and will be amortized over a period of IO years at approximately -annually.

• The Cooperative defers the realized and unrealized gains and losses from NDT investments and will begirito amortize the realized gains and losses before the commencement of decommissioning SSES. F o ~ ~ e d December 31, *.2019, the Cooperative deferred ~ n net realized gains a n d * - n net unrealized gains.

20

Allegheny Electric Cooperative, Inc.

N<>tes-to. Cons.olidated Financial Statements December 31, 2019 and 2018 Notes: As.set Retirement Obligation Amounts collected from the Cooperative's members for decommissioning,less applicable taxes, are deposited in external trust funds for investment and can onl be used for future .,

decomnlissioning costs! The fair value of the NDT was and December31,2019 and 2018, re~pectively.

The changes in the carrying amounts of assetretrremen:t obligations were as follows (inthousands):

2019 2018 Beginning balance Accretion expense Ending balance The amountofactualobligation could differ materiallyfrom the*estimates reflected in these consolidated :financial statements.

Note 9: Long-Tenn Debt Long-term debfconsists of credit agreements with NRUCFC and CoBank. The terms of the notes as of December 31 ate as. follows (in thousands):

2019 2018 NRUCFC.~ note dated 2006 (A)

NRUCFC _: note dated 2006 (B)

NRUCFC- note dated 2006 (C)

. NRUCFC- note dated 7006 (D,)

. NRUCFC - notes dated20J 1 (E)

Ct>Bailk - notes dated 2015 (F)

CoBank - notes dated _2016 (G)

CoBank- notes:dated 2017 (H)

Less current installments Long~term debt, excluding current installments (A) Payable in quartetlyirtstallments ofvacying amounts through 2044. Annualinterestrate of 4.4% and 6;90% atI>ecember 31, 2019 and 2018, respectively:

(B) Payable in quarterly installments of varying amounts through 2044. Annual interest rate of 6.25% atDecember 31, 2019. -.

21

Allegheny Electric Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 201!J and 2018 (C) Pi(yable in quart¢rlyirtstallrilents of varying ammmts through 2021.

• Annual interes.t rate 9f 6.9% atDecember 31, 2019.

(D) P~yable in quarterly installm~nts ofvarying amounts through 2025. Annual interestrate of 7.25% atDecember31, 2019. *

@) Payable in quarterly installments of varying amounts through 2044. Annual interestrates rang;e from 2.95% to 5.25% at December 31, 2019.

(F). Payable in quarledyinstallments of varying amounts through 2045. Annual interestrates range from3.40% to 4.41 % at December 31, 2019.

(G) Payabie in quarterlyjnstallments of varying amounts through 2045. Annualinterestrates range from 3.64% to 4.27% ~tDecember 31, 2019, (H) Payable in quarterly installments of varying amounts through 2033. Annual interest rates range from 3.50% to3;88% at December 31, 2019 .

.In February 2014,. the Cooperative converted certain notes with NRUCFC totaling -

from a fixed interest rate of7.00% toa ~ r i a b l e rate;which was2.5.5% through January 2015. The cost of this conversion w a s ~ The cost of conversionwill be amortized through the first quarter of 2022.

In January 2019, the Cooperative c.onverted certain riotes with NRUCFC totaling ~ r o m aniriterest rate of 6:90%to 4.40%, which were originally due to repricein April 2020. The cost of this. conversion was - T h e ~ost will he* amortized through March.2020-Principal payments of allloilg-term debt are as follows (in thousands):

2029 2021 2022 2023 2024 Thereafter As of December 31,. 2019~ the. C ~ a d _ . . . . . .*n avai."lable line of credit funds expiring.in 2023 .and 2024 and ~ i n available undrawn tenn debt.

Substantially all assets of the* Cooperative are pledged to secure the notes payable. The Cooperative is required to:maintain certain tovenants, includmg an annual debt service coverage ratio. The Cooperative was in compliance with the applicable covenants as ofDecember31, 2019 and 2018.

The Cooperative has, an unsecured -operating line of (;redit with NRUCFG thaLexpires on May 31, 2024. There were no borrowings againstthis line as of December 31, 2019 and 2018.

22

Allegheny Electric Cooperative, Inc~

NQtes to Consolidated Fin_ancial Statements December 31, 2019 and 2018 The interest rate on the line ofcred1tfh1cttlates as establishe4 by NRUCFC_ and was 3.25% and

3. 75% as of December 31, 2019 and 2018, respectively.

Additipnally, the Coopera,tiyehas an unsecured.~~ ofcre_dit commitmentfrom NRUCFC set to expire on .September 25, 2023. Under this commitment, the Cooperative has unsecured letter of credit facilities totaling - a n d ~!December 31, 2019 and 2018, respectively. The letter of credit'is set to expire at the end of2020. As of December 31, 2019 and 2018, no funds have been drawnagainstthese facilities.

The ma:ximuqi amount oµtstanding under the abov,e two cre_dit facilities was - a n ( !

~ u r i n g 2019 and 2018, respectively. *

• During 2()19 and 2_*-018the Cooperative incurrereportini purposes.

Ther_e was.no pro:vision for federal income taxes at December 31, 2019 and 2018. The Coopetativ~

is notsubjectto state income- taxes.

Note 11: Related Organization Transaction A related organization, the Pennsylvania Rural Electric Association (PREA); has provided the Cooperative*witficertain management, general and administrative services ona cost.reimbursement basis: The costs for services provided by PREA'were approximately - a n d ~ f o r theyeats ended December 31, 2019 and 2018, respectively.

Note 12: Consolidated Variable Interest Entity As the prinµry beneficiary, the Cooperative consolidates CCS from which its payroll and other related costs are paid. The general creditors -of CCS have no recourse against .the general credit of the Cooperative.

23

All:egheny Electric Cooperative, Inc.

Notes to Consolidated Financial Statements December31, 201!>> and 201.8 The following table sµrtun:arizes the carrying'. amount of the assets and iiabilities of ccs included in the.Cooperative's accompanying consolidated balance sheets at December 31 (in thousands):

2019 2018 Current asse.ts Cash and cash equivalents Ac.counts receivable~ affiliated organization.

Qtller receiv.ables Other current assets Prepaid pension expense Totai assets Current liabilities Accounts. payable and accrued expenses Accrued postretirement benefitcost Accounts payable, affiliated organization Advance from affiliated. organization Total liabilities Note 13: Postretirement Benefits As of November 1, 1995 (the effective date), postretirement medical benefits are only offered to grandfathered employees. There are two. different levels of benefits:for those grandfathered retirees. For eachfetiree over the age of 62 on the effective date, CCS pays the full premium for the approptjate medical insuratice for the cove:red.p.articipant; For :those tltat were over the age of 55 b:ut younger than 62 on the effective date, Ccs pays a nraximum premium for m*edic~l insurance equal to tlie policy premium on November 1, 1995. In this second group; the participantis responsible f'or any increases above :this amount. Qn December 31, 2019 and 2018,. there.were. six and.seven individuals covered under this plan, respectively. CCS expects to contribute appro~ately ~ o t h e plan in.2020. This amount wiil be. \lllocatedto the Cooperative and PREA based on historical payroll ailocatiorts. of the retirees. covered under the plan.

Note 14: Employee Benefit Plans All employment relationships .are thrqugh CCS, the con:solidatecl VIE of the Cooperative. CCS' leave policies provide for payment of unused leave after the end of*each calendar year for 2019 and 201K A provision has been recorded for this liability.

Multiemp/oyer Pension Plan Substantially all employees of CCS participate in the National Rural Electric Cooperative Association (NRECA)Retirement Security Plan (RS Plan). The RS Plan is a defined benefit 24

Allegheny Electric Cooperative, Inc.

N<>tes to Consolidated Financial StatemE!hts DecE!mber31, 2019.and *201s pension planqualified under. Section 401 and t~-:exen;ip(under Section. 5()1(a) ofthe Irite:rnal Revenue Code. Itis a mtiltiemployer planµnderthe accounting standards. .The plan sponsor's employer identification number is 53-0116145 and the plan number is 333.

A unique characteristic of a multiemployet plan compared to a single-employer plan is that all plan assets are.available to pay benefits ofanypian 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 's contribµtions, through CCS, Jo the RS Piart in 2019 an<! 2018 represerttedless than?.% ?ftheto*ta*l contri.*butions madetoJhe R S ~ part~ployers .. Total co~trtbutions made to the RS Plan by CCS were ~ a n d . . - i , n 2019 and 2018, respectively. .

• For the RS Plan, a "zone status" determination is notrequired and, therefore, notdetermined under the Pension Protection Act o/2006 (PPA). In addition, the accumulated benefit obligations and plan assets are not determined orallocated separately by individual:empl~yers. In.total, the RS*

Plan was more than 80% funded atJamiary 1, 2019 and 2018i ba.sed on the PPA funding target and PPA actuari.tl value of assets on those dates.

Because the provisions of the PPA ~o not apply to the. RS Pl@, funding jmproyement plans and surcharges are n9t applic*able. Futilte contribµtion requirements are detetmined eachy¢at as part of the actuarial valuation of the RS Plan and may change as a result of plan experience, RS Plan Prep*ayment

. Durin..g_ 2013, t h ~ v e ~lected to make a ;voluntary contributiontot?e RS P!an o.*.f .*

approximately ~ h ich was funded wtth cash from the Cooperative obtained through

• long-termdebtwithNRUCFCof~nd.cashof

• s anadvance.fromana:ffiliated organization. The Cooperative recorded a prepayment of

• as a preprud pertsiort expense and - a s an.advance from an affiliated organization. The prepayme;;rtt is recorded as a deferred debit on the accompanying consolidated balance sheets andis being: amortized over approximately 10 years:, which js the average estimated remaining s¢rvice life of RS Plan participants. Annual amortization is approximately ~ o r t h e prepayment and ~ o f the advance from the affiliated o r ~ The re.1113ining unamortized balance of the._

prepayment was - a n d ~ a s ofDecember.31, 2019 and 2018, respectively; Defined Contribution Plan The Cooperative; through CCS, .has a 40l(k) defined contribution plan covering substantially all employees; which~llows for both em~d.co~~ontributions. TotaJ contributio..ns by CCS to the plan were approximately ~ a n d ~ f o r 2019 and 2018, respectively.

25

Allegheny Electric Cooperative, Inc.

Notes to Consolidated Financial Statements December 31, 2019 and 2018 N*ote 15: Commitments and Contingencies Power Supply and Transmission Agreements The Cooperative. has entered into power supply and transmission agreements with various service providers. A significant number of these agreements are umbrella agreements and do not bind the Cooperative to enter into any type oftransaction. Since June 2007, the Cooperative has issued periodicreq11ests for proposals (RFP); under these agreements, for energy and/or capacity products fotvatying quantities and tellil!>.

As.ofDecember 31, 2019, there were severai significant energytransactionsunderthese _umbrella agreements with some energy deliveries* extending .throµgh2022. The-Cooperative purchased approximately 32% and 33% of its total energy supply-through these umbrella agreements during the years ended December 31, 2019 and. 2018, respectively;*

The Cooperative also purchases capacity through PJM's Capacity Market auctions. All of the capacity purchased through these auctions w.ts or will be needed to serve the Cooperative 's load.

The most recent auctiony held 1.n May 2018, procured capacity for the period June 1, 2021 through May 31, 2022.

A surtmrary of the p~nv:er suJ>Ply agreements is as follows:

New York Power Authority This contract meets a porti9n of the Cooperative 's base load arid peaking requirements, and its delivered.costtothe Cooperative's members is below market. The current contract for the Niagara Project terminates-in 2025. The current contract for the St. Lawrence Project terminates in 2032.

Other Power Su_pply As the result ofa competitive request for proposals, the Cooperative entered into an agreement in March 2017 to provide the Cooperative's remafuing unmet load requirements beginning in Jamiary 2018. The'Cooperative purchased energy ata fixed price under the agreement and the seller assume<;! all q11antity .and operating risks during the term of the* agreement, which expired on December 31, 2018. In February 2018, after negotiationwith the same providerfor the. 2018 contract, the Cooperative enteredinto a similar fixed price .tgreement to provide the Cooperative' s remaining load requirements for the period January 1, 2019 through December 31, 2019. In April 2019, as a result of a competitive RFP, the Cooperative entered into an agreement with a different supplier to provide the Cooperative's remaining untnet load requirem.ents for the period January 1, 2020-through December 31, 2020. Under the 2020 contract, the seller assumes all load volume risk during the term of the agreement and the Cooperativ~ assunies generation operating risk.

The Cooperative also used the RFP process to enterinto power purchase agreements in August 2018; October 2018 and June 2019 for selected bloc,kenergy products during various months of 2019 and 2020. Additionally, the Cooperative used the RFP process to. enter into power purchase agreements in.September2019, November 2019 and December 2019 for selected block energy products during various months of2021 and 2022.

26

Allegheny Electric Cooperative, Inc.

Notes to Consplidated Financial_ Statements December 31, 2Q19 ,md 2018 Various pui"chased power agreements requite,the Qpoperative to pos.t collaJ¢tal deposits for exposure exceeding specified thresholds. As of December 31, 2019 and 2018, collateral deposits totaled - a n d ~espectively. Otheragreements. allow Jhe C<;>operativeto provide additional credit support in the form of an irrevocable standby letter of credit. * *

• SSES Capacity Performance Penalty Insurance Policy Forth¥ planning period spailnin.g June 1,.2017 through May 31~ 20.18, the Cooperative mitigated its exposure.to pote11iial PJM Capacity Performanqe penalties by-purchasing aninsurance policy from North American Elite Insura,nce Company on January 24, 2017, Thet~i;ms :of this policy di~tated th.at the Coop_er

__ ative would. be reim.b.ursed fo._ran

__Y non-perform .. :1°_ce_c~rge.~om unplann,ed 011tag~s qr unplaIIIled derates up t9 an aggrega(e policy hm1t of . . _ a n d a maxiirtum of90 cprisecutiVe days per e:vent. The Cooperative made rio claims during the plariitlng period and did notobtain-.a policy for coverage after May 31, 2018. * **

Transmission Service Transmissionservicefor the Cooperative' sloadis provided.thr()ugh a*hybrid arrangement consisting of the PJMOpen Access Transmission Tariff (OAIT) and 11te pre-existing_ Wheeling and Supplemental Power Agreement with Pennsylvania Electric Company.

• A separate irrevocable stindbyletter of\:,r~dit is related to ol;,ligations existing uilder the QATT.

This letter of credit was issued in the.amount of o the btmefit of PJM Settlement,. IIic.

The letter of creditwas _reduced to the amount of *n 2019. The letter of credit was provided byNRUCFC.and is Valid tlµ'o:ughDecertd:>et 31, 2020.

Insurance Susquehanna Nuclear, LLC, _as the 9.0% owner and sole operator of SSES;. mid the Co(}petative, as owner of a 10% undivided interest in SSES, participate in certain insurance programs thatprovide coverage for the SSES nuclear generation plant.

The Price-Anderson.4.ct; as amended (the Act), is a :United States federal law governing liabilify-rel_ated is_suesancJ ensur~s the availability ()ffundsfor public liability claim,s arising from an incident at anyU;S.-licensed nuclear facility. It also seeks to limifthe liability ofnriclear reactor owners for such claims from any single incident At December 31, 2019, the liability per incident was or such daiins, which i$ fonded by msuraii¢e coverage from Afueri¢an Nuclearinsurers and an industry assessment program. Under the.industry assessment program, in

. the event Clf a nuclear ~cidentat any of the r e a c t o ~ t h e ~ct? Sus.quehannaNuclear,

.LLC and the Cooperative could be assessed upto - ~ p e r incident, payable.at

~ e r year. . .

Additionally; SSES is (;OVered by insurance.programs provided by NEIL, an industry mutual insurance company. AtDecember 31 2019 the. SSES plant is insuredl?y NEIL coverage against

' d Josses up to and ]J.on;..nucle<J'r property damage losses lip to Under the NEILcoverage, SSES is also.insured against the .cost ofreplacement power during prolonged outages of the nuclear units cause.dby certain specified conditi_ons. Under the NEIL property and replacement power insurance programs, Susquehanna Nuclear, ILC and: the 27

Allegheny Electri:c Co.operative, Inc.

Notes to Consolidated Financial Statements Decernber3*1, 2019 .and 20l8

• Coop~rative co~l~ be*?i.sesseclrettospec~v~ the event9fthe insurers' adverse loss expenence. This .

maximum. assessment is ~

Utigatfon The Cooperative may be subject to claims andJawsuits that arise primarily in the ordinary course of business. At Dec~per 31, 20J9, no su~hmaterial or significant claims or lawsuits existed.

Note 16: Deferred Credits Deferred Revenue Plan The Board has established a deferred revenue:plan, which seeks to. stabilize inembers' rates for 2019 to mitigate the effects of expected increases in rates. The deferral of revenue for 20i9 was d¢teimined as any amountabove ~ f assignable margins. Deferr¢d revenue additions and deletions .are recorded in.operating.revenues in the accompanying consolidated statements of margin. A - r e v e n µ e deferralwasmade durin~ecember31, 2019,deferred revenues: associated with the deferred revenue plan were ~ The changes in deferred revenues in 2019 and 2018 were as.follows (inthousands):

2019 2018 Beginning; balance $ $

Additions Deletions Ending balance Regulatory Liability The Cooperative has established a policy to defer unrealized fair value. gains and losses associated

• with hedging activities andrecognize in earnings only at the settlement of these instruments (see Note 6); As of December 31, 2019 and 2018, approximately' tlllaand ~ a s included in deferred, credits to deferunrealized gains pn C>Utsfanding F"1R positions. .

Note 17: Disclos1.1res.About Fair Value Qf Assets and Liabilities Fairvaluds* the price that would be received to s~ll an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements rimstmaximize,the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels ofinputs that may* be used to measure fair value:

Level 1 . Quoted prices in active markets for identical assets or liabilit1es 28

Allegheny Electric Cooperative, Inc.

N9tes to Consolidated Financial Statements December 31, 2()19 and 2018 Lev¢I 2 Obseivable input~_ oth¢t than Lev:ei lpri¢es, such as quoted prices fpr._similat as~ets

,or liabilities; quoted prices in active marke_ts _that are notactive; Qr other inputs that are obsetvable or can be-corroborated by obsetvable market data for.substantially the full term of the assets orliabilities Level 3 Unobseivable inputs that are supported by little or no*marketactivity and significant to the fair value of the assets or liabilities - -

Recurring Measurements The following tables present the fair value measurements of assets and liabilities recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis, and the level within the fair value hierarchy irt which.the f.1itvalue measurements fall atD¢cembet 31 (in thousands):

,' 2019

-Quoted Prices in Active Significant Markets for :Other Significant Identical Observable *Unobservable As~e~ - Input$ Inputs Fair Value (Level 1) (Level 2) {Level 3)

Nuclear Decommissioning Trust Available~for-sale securities Money market fimds $ $ $ $

-- U.S. government securities Corporate bonds Ot:h~r obligations Total available-for-sale securities Equity securities Common stock Total nuclear decommissioning irust Internal Investments

• _ * -=----- --- ----

Available-for-sale securities Corporate bonds Other obligations

~ ---

Total internal investments Derivatives Federal transmission rights Total investments_

~ ~ ~ $

29

Allegheny Electric Cooperative; Inc.

Note.s to Consolidated Financial Statements December 31, 2019 and 2018

• 2018 Quoted *prices in Active* Significant Markets for .- .. Other _Significant Identical

• Observ.able Unobserval:>le Assets Inputs Inputs Fair Value (Level 1) {Level 2) (Level 3)

Nuclear Decommissioning Trust Available-for-sale -securities Money marketfimds $

US. government securities Corporate bonds Other ob~gations Common stock trust Internal Investments

• - ** '-=---- ----- -----

Total :ri.uclear .decommission.mg -. * . _

Available-for-sale securities Corporate bon!ls

• Other obligations* *

• Common stock :

I Total internal investments -----

Derivatives F.ederattransinissiori rights Total investments Followingis a description ofthe.valuationmethodologies andinputs used,forinstruments .

measured at fair value on a re,curring basis and re.cognized in the accompanying consolidated balance .sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy; - -

Avai/ab/e-for~Sa/e Securities Whe,re quoted market pri<;es <lre ayailable in an ;lcttve m.irket, securities are cl_assified within Level 1 _of the valuation bjerarchy. Level 1 securities include highly liquid governmentbonds. If quoted market prices are not available; then fair values are estimated by using pricittg *models, quoted prices .ofsecurities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include one, or a combination of observable inputs such as benchmark yields, reported trades, broker/dealer quotes, benchmark securities, bids, offers, and reference datamarketresearcfrpubHcations and are 30

Allegheny.Electric. Co0.pe~ative~ Inc.

NqtE!s to Con:5olidated F.inancial Statem~nts December31, 2()19_and 2()18 classified.within Lev,el 2.ofth¢ valuation hierarchy. Leyel 2*securities*include certain collate:ralized mortgage and debt obligations and certain municipal securities. Incertain cases where Level 1 or Level 2 inplits are not available, securities are clas~ified witlutt Level 3: of the hierarchy. Inputs include quoted.market prices, benchmark securities, bids, offers and

_ broker/dealerquotes. * *

• Equity Securities Where quoted market prices are available in an active market, securities ate classified. within Level 1 of the valuation hierarchy. Level 1 securities include exchange-traded equities. If quoted market prices are not available, then fair val11es are estimated by using pricing models, quoted prices pfsecurities with similar chafactetistfos oi: <;liscountecfcash flows~ Fonheseinvestments, the inputs usidJ>y the_ pricing seryice to determineJair. value may include <>ne, *or a combination of observable inputs such as benchmark yields,*reported trades; broker/dealer quotes, benchmark

. securities, bids, offers; and reference. data market research publications and are classified within Level 2of the valuation hierarchy. In certain cases whereLevel 1 or Level 2 inputs are not available, securities are classified within Level 3,of the hierarchy: *Inputs include quoted market prices; benchmark securitiei;, bids,.- offers artd *btoker/clealer quotes.

Derivatives The fair v~iue is estimated using inputs that are obs~rvable or that can be ~~rroborated by observable market data a,n<!, therefore, are classifi~d withi11_ Level 2 of the va,luati<>n hierarchy. For F1Rs, inputs-in.chide clearing prices ofthe FTRs atmulti-year, annual, seasonal and monthly auctions adJiJsted for seas<>nalexpecta:tions ofthe supply and demand. ofenergy.

There have been no significant changes in .the valuation techniques-during the year ended ,

December 31, 2019. There were no assets classified within Level.3 of the fair value.hierarchy at Decembet31,2019 artd20l8.

FaitValueofOtherFinancial Instruments the estimate.d fair values._ of the Cooperative 's other financial instruments atDecemb~r 31-are as follows (in thousan<:ls ):

2019 *2018 Carrying Estimated Carrying Estimated Amount Fait Value Amount Fair Vallie Cash and cash equivalents $ $ $ $

Investments inassociated organizations "$ s' $ "$

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Allegheny Electric Cooperative, Inc.

Notes-to Consolidated Financial Statements December 31, 201!Jand 2018 The following m~thods wete used to estimate the fair value ofall other :finaricialins.trµments riot recognized in theaccompa11ying. c.onsolidated balance sheets:

Cash.and Cash Equivalents The carrying amount approximates fair value.

Investments in Associated Organizations Management was notable to estimate the fair value of investments that represent the Cooperative's investment in memberships amlother associated organizations and they remain at their cost, minus impairment; if any, plus:orminus changes resulting from observable price changes in orderly transactions for the identical or a similar investmentof the same issuer.

Note 18: Realty Taxes The Cooperative's portion oflocalrealestate taxes relatedto SSES is billed.by and paid to Talen.

The Cooperativeis billed and pays directly to various focal tax jurisdictio~Jocal real estate taxes on other property that is exclusively owned by the-Cooperative.

Note 19: Subsequent Events Subsequent evti~nts have been evaluated through April 3, 2020, whichis the date the consolidated firiaricial statements were available to* b_e issued.

i:Jec_linf3in lnvestmentFair Value There has beensignificantvolatility in theinvestmentmarkets both nationally and globally since December 31, '.2019, resultiilginan overall market decline, which.has res.ulteq in a substantial decline in the value of the NDT investment portfolio.

Prepayment of Pen.sicm Benefits In January 2020,the .Cooperative made a one-,.time payment of ~ f o r the Cooperative's 10% interest in SSES' Pension andPost-RetirementBene:fits Plan as aprepaymentofthe future associated costs.

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