NOTE 5—Wholesale Power Contracts

Our financial relationships with our member distribution cooperatives are based primarily on our contractual arrangements for the supply of power and related transmission and ancillary services. These arrangements are set forth in our wholesale power contracts with our member distribution cooperatives which are effective until January 1, 2054, and beyond this date unless either party gives the other at least three years notice of termination. The wholesale power contracts are “all-requirements” contracts. Each contract obligates us to sell and deliver to our member distribution cooperative, and obligates our member distribution cooperative to purchase and receive from us, all power that it requires for the operation of its system, with limited exceptions, to the extent that we have the power and facilities available to do so.

An exception to the all-requirements obligations of our member distribution cooperatives relates to the ability of our eight mainland Virginia member distribution cooperatives to purchase hydroelectric power allocated to them from SEPA, a federal power marketing administration. Purchases under this exception constituted less than 2.0% of our member distribution cooperatives’ total energy requirements in 2016.

There are two additional exceptions to the all-requirements nature of the contract. One exception permits our member distribution cooperatives to receive up to the greater of 5% of their demand and associated energy requirements or 5 MW and associated energy from owned generation or other suppliers. The other exception permits our member distribution cooperatives to purchase additional power from other suppliers in limited circumstances following approval by our board of directors.

If all of our member distribution cooperatives elected to utilize the 5% or 5 MW exception, we estimate the current impact would be a reduction of approximately 175 MW of demand and associated energy. As of December 31, 2016, our member distribution cooperatives collectively received approximately 60 MW of demand and associated energy under this exception. We do not anticipate that either the current or potential full utilization of this exception will have a material impact on our financial condition, results of operations, or cash flows.

As of December 31, 2016, none of our member distribution cooperatives had utilized the other exception noted above.

Each member distribution cooperative is required to pay us monthly for power furnished under its wholesale power contract in accordance with our formula rate. We review our formula rate design at least every three years to consider whether it is appropriately achieving its intended results. The formula rate, which has been filed with and accepted by FERC, is designed to recover our total cost of service and create a firm equity base. See “Regulation—Rate Regulation” in Item 1, "Legal Proceedings—FERC Proceeding Related to Formula Rate" in Item 3, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Results—Formula Rate” in Item 7.

More specifically, the formula rate is intended to meet all of our costs, expenses, and financial obligations associated with our ownership, operation, maintenance, repair, replacement, improvement, modification, retirement, and decommissioning of our generating plants, transmission system, or related facilities, services provided to the member distribution cooperatives, and the acquisition and transmission of power or related services, including:

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payments of principal and premium, if any, and interest on all indebtedness issued by us (other than payments resulting from the acceleration of the maturity of the indebtedness);

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any additional cost or expense, imposed or permitted by any regulatory agency; and

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additional amounts necessary to meet the requirement of any rate covenant with respect to coverage of principal and interest on our indebtedness contained in any indenture or contract with holders of our indebtedness.

The rates established under the wholesale power contracts are designed to enable us to comply with financing, regulatory, and governmental requirements, which apply to us from time to time.

Revenues from our member distribution cooperatives for the past three years were as follows:

	Year Ended December 31,
	2016		2015		2014
	(in millions)
Rappahannock Electric Cooperative	$	271.2	$	334.2	$	311.7
Shenandoah Valley Electric Cooperative		164.5		181.0		172.1
Delaware Electric Cooperative, Inc.		105.9		114.0		106.8
Choptank Electric Cooperative, Inc.		77.2		83.8		80.2
Southside Electric Cooperative		67.9		76.5		70.2
A&N Electric Cooperative		51.1		55.5		53.0
Mecklenburg Electric Cooperative		41.2		47.4		43.8
Prince George Electric Cooperative		22.5		25.4		23.5
Northern Neck Electric Cooperative		21.3		23.4		21.3
Community Electric Cooperative		14.4		16.6		15.3
BARC Electric Cooperative		9.9		11.1		10.1
Total	$	847.1	$	968.9	$	908.0