S P Global Ratings RatingsDirect Oi Moffat County Colorado Tri State Generation and Transmission Association Inc CP Rural Electric Coop Primary Credit Analyst David N Bodek New York 1 212 438 7969 david bodek@spglobal com Secondary Contact Paul J Dyson San Francisco 1 415 371 5079 paul dyson@spglobal com Table Of Contents Rationale Outlook Springerville Generating Station Unit 3 Debt WWW STANDARDANDPOORS COM RATINOSDIRECT SEPTEMBER 11 2017 1 Moffat County Colorado Tri State Generation and Transmission Association Inc CP Rural Electric Coop Credit Profile US 46 8 mil pollution ctrl rfdg rev rmktd 10 2 2017 bnds ser 2009 dtd 02 04 2009 due 03 01 2036 A Stable Long Term Rating Tri State Generation Transmission Assn unsecd revolt credit Long Term Rating Tri State Generation A Stable Affirmed A Stable Affirmed A Stable Affirmed Transmission Assn ICR Long Term Rating Tri State Generation New Transmission Assn RURELCCOO Long Term Rating Rationale S P Global Ratings has assigned its A rating to Moffat County Colo s 46 8 million pollution control revenue bonds Tri State Generation and Transmission Association Inc Project series 2009 in connection with their remarketing in a term rate mode During the term rate mode the bonds will bear interest at a fixed annual rate The outlook is stable Moffat issued the bonds for Tri State and the county can only use the revenues that it receives from the utility to make debt service payments The financing structure obligates Tri State to unconditionally pay these bonds debt service In addition the utility issued a note to the county that provides it with a security interest in its assets under its mortgage indenture Moffat s security interest on the bonds is on par with Tri State s senior secured debt A portion of the utility s 750 million revolving credit facility is a letter of credit that supports the liquidity needs of the variable rate demand obligations tenders while the bonds are in a weekly variable rate mode That mode will end in October Simultaneous with the conversion to the term rate mode Tri State plans to terminate the letter of credit The term rate bonds will be subject to mandatory tender when the term mode expires in five years which could expose the cooperative to a liquidity event if the bonds cannot be remarketed However we view as mitigating factors the relative size of the 47 million of 2009 bonds compared to the entirety of the 3 4 billion debt portfolio the utility s plans to continue to maintain its revolving credit facility at or near its current level which more than sufficiently covers the 2009 bonds liquidity exposure and Tri State s track record of sound balance sheet cash If before the term mode ends the utility were to meaningfully reduce its cash balances or the size of its revolving credit facility we would lower the ratings we have assigned to the utility and its debt obligations because an inability to take out tendered bonds would constitute a default event on the 2009 bonds that would cross default to the balance of Tri State s debt covered by its indenture At the same time S P Global Ratings affirmed its A 1 rating on the utility s up to 500 million commercial paper program and its A rating with a stable outlook on the following W WW STANDARDANDPOORS COM RATINGrSDIRECT SEPTEMBER 11 2017 2 Moffat County Colorado Tri State Generation and Transmission Association Inc CP Rural Electric Coop The issuer credit rating ICR and senior secured debt rating on Tri State and The cooperative s 419 million 2003 series A and series B pass through trust certificates that financed the construction of the Springerville Unit 3 power plant through a lease structure The A ratings reflect our views of the following credit strengths Tri State is a generation and transmission cooperative with what we consider a broad membership base It has long term contracts with 43 wholesale members serving approximately 600 000 retail meters across a 200 000 square mile area in Wyoming Nebraska Colorado and New Mexico We believe that this breadth contributes to revenue stream diversity However residential customers modest 30 share of energy sales sparse customer density low service area income levels and customer concentrations in the natural gas and petroleum sectors temper these benefits Energy sales data show that Tri State s end use customers electricity consumption places it among the 10 largest generation and transmission cooperatives in the U S Members have exclusive rights to sell retail electricity in their defined service territories We calculated accrual basis fixed charge coverage FCC levels of 1 2x in 2015 and 1 3x in 2016 We believe these ratios reflect the benefits of 2014 s debt reamortization and moderate rate increases Our FCC calculation treats capacity and tolling payments to other generation suppliers as debt service in lieu of operating expenses because we view these payments as a vehicle for funding the suppliers recovery of capital investments in generation The ratios also reflect Tri State s use of bullet maturities for 1 billion of the utility s 3 3 billion of debt which defers a portion of the principal amortization and raises coverage relative to a fully amortizing structure Using Tri State s financial forecast which we view as plausible we calculate the utility s potential to maintain coverage levels at 2015 2016 levels through 2021 The forecast reasonably assumes that member revenues will represent about 90 of energy sales revenues which is higher than recent years 85 Also the utility forecasts that member revenues will rise a moderate 3 over five years and debt balances will remain relatively stable at approximately 3 5 billion as the capital program proceeds The cooperative projects that its 2014 debt reamortization and the near term annual debt service reductions will leave a greater percentage of operating cash flow available for capital spending which help contain debt requirements S P Global Ratings also considers these exposures in its analysis There is evidence of residual member discord that dilutes the stability and predictability of the revenue stream and that might frustrate strategic planning For example member Kit Carson Electric Cooperative severed its relationship with Tri State in 2016 paying an exit fee Also member Delta Montrose Electric Association representing about 3 of sales did not agree to extend its wholesale power contract to 2050 from 2040 Nevertheless 42 other members have extended contracts to 2050 We consider a high reliance on coal resources as exposing the utility and its customers to the costs of complying with emissions regulations Tri State relied on owned and contracted coal fired resources for 54 of its 2016 electricity production Purchases from coal concentrated Basin Electric Power Cooperative add to the utility s level of coal reliance Tri State s 3 4 billion debt portfolio includes 1 25 billion of bullet maturities The balloon payments are due in 2024 2040 2044 and 2046 lack sinking funds and defer to later years a sizable portion of the utility s financial burden These structures skew debt service coverage DSC and FCC ratios relative to those of cooperative utilities that exclusively use amortizing debt Our analysis assessed an imputed mortgage style amortization for comparability which suggested that FCC would be about 5 basis points lower and still sound for the rating The amount of the 2014 restructuring s annual debt service savings will decline each year However the utility WWW STANDARDANDPOORS COM E ATINGSDIRECT SEPTEMBER 11 16 l 2017 3 dHiI 3000I08St Moffat County Colorado Tri State Generation and Transmission Association Inc CP Rural Electric Coop nevertheless projects relatively stable DSC and FCC while introducing modest rate increases Tri State expects that lower near term debt service will reduce rate pressures on its member distribution cooperatives allow for greater use of cash financing of portions of its large capital program and can appease members that have challenged recent years rate adjustments Revenues from non members represented 15 20 of 2013 2016 operating revenues However the high level of contracted nonmember sales tempers risks of revenue stream volatility Also the percentage of members contributions to energy sales has been increasing We view the trend of rising member sales as reducing the utility s exposure to wholesale markets and their uncertainties Members are allowed to procure up to 5 of their electric power requirements from distributed or renewable generation To date members have dedicated 145 megawatts MW of capacity to this program compared to their 2 802 MW peak demand on the Tri State system The cooperative s mortgage indenture provides that its revenues and most of its tangible assets secure its first mortgage bonds The Springerville plant s Unit 3 and its related assets secure another approximately 419 million of debt Tri State s nearly 3 4 billion of debt at year end 2016 was sharply higher than 2008 s 1 7 billion in part because of 2009 s consolidation of debt associated with the utility s lease interest in the Springerville Unit 3 coal generating station in Arizona More recently debt rose to 3 4 billion at Dec 31 2016 from 3 0 billion at Dec 31 2012 Although the cooperative projects about 1 3 billion of 2017 2021 capital spending its financial forecast plausibly shows relatively constant debt balances because nearly 500 million of existing debt will amortize during those years and funds available after debt service could create about 725 million for of capital spending which should temper the need for additional debt Investments in transmission and existing coal facilities represent the largest elements of the capital plan Six owned and leased coal fired base load generation stations providing 1 874 MW of capacity dominate Tri State s 2 841 MW portfolio of owned and leased generation This fleet incudes 967 MW from natural gas or oil fueled peaking power plants In addition the utility contracts for low cost hydroelectric power purchases from the Western Area Power Administration WAPA and renewable resources consisting principally of wind turbines Members peak demand has been between 2 600 MW and 2 800 MW since 2010 Tri State believes that its supply portfolio will meet its needs through 2025 Economy market purchases rose to 13 of 2016 s power supply up from 4 in 2013 Average wholesale rates of 7 1 cents per kilowatt hour kWh were unchanged for all members during 2013 2015 partially because of member discord with Colorado and New Mexico members that challenged the utility s rate adjustments and the cooperative s allocation of demand and energy charges Because Tri State has revised its rate structure s demand and energy charges and has made strides in resolving the customer conflicts management believes the utility can incrementally raise rates The average member wholesale rate was 7 2 cents per kWh in 2016 Tri State lacks a formal fuel and purchased power adjustment mechanism Consequently its board s willingness to adjust rates as costs rise is an important credit quality indicator WWW STANDARDANDPOORS COM RATINGSDIRECT SEPTEMBER 11 1912Fd 2017 1 4 000IIWR q Moffat County Colorado Tri State Generation and Transmission Association Inc CP Rural Electric Coop Outlook The stable outlook reflects our view that the debt reamortization is producing annual debt service savings that support Tri State s forecasts of sound coverage benefit bondholder protection and create capacity to apply operating cash flow to capital needs In addition progress in resolving customer discord issues should facilitate strategic planning and provide financial flexibility Upside scenario We do not expect to raise the rating within our two year outlook horizon because the utility s debt reamortization shifts principal payments to later years Also we view Tri State s revenue stream as exposed to the volatile oil and gas sectors Furthermore the cooperative like many other utilities that depend heavily on coal for generation needs to develop a strategy for responding to emissions regulations and competitiveness issues Downside scenario We could lower the ratings if Tri State does not achieve sound coverage in line with its projections whether due to member discord a lack of ratemaking flexibility higher than expected costs attributable to the capital plan or complying with environmental regulations We could also lower the ratings if the utility does not maintain liquidity sufficient to meet the 2009 bonds liquidity requirements Springerville Generating Station Unit 3 Debt In 2003 Tri State financed the construction and acquisition of the Springerville Generating Station Unit 3 by creating a lease structure with Springerville Unit 3 Holding LLC as the owner lessor The lessor issued notes to fund construction In turn a pass through trust purchased the notes with the proceeds of the Tri State 2003 series A and B pass through trust certificates that the utility sold to investors Although the cooperative s obligation to make lease payments is a general unsecured obligation of the utility Unit 3 and its related assets at the plant site secure the certificates As of June 30 2017 419 million of certificates were outstanding Their maturities extend through 2033 The lessor owns the power plant and it leases the underlying land from Tucson Electric Power Co and has sublet it to Tri State The power plant lease is a triple net lease that is absolute unconditional and not subject to abatement The three month outage to repair turbine damage in 2012 highlights the significance of these lease provisions Based on its 51 equity interest in the Springerville Unit 3 Partnership L P Tri State fully consolidates the project s assets liabilities and expenses in its consolidated financial statements and its income statement does not include lease expense Tri State Generation Transmission Assn Long Term Rating Tri State Generation A Stable Affirmed A 1 Affirmed Transmission Assn cp Short Term Rating WWW STANDARDANDPOORS COM RATINGSDIRECT SEPTEMBER 11 F 2017 I 4010 5 Moffat County Colorado Tri State Generation and Transmission Association Inc CP Rural Electric Coop Ratings Detail As Of Tri State Generation Transmission Assn RURELCCOO Long Term Rating WWW STANDARDANDPOORS COM RATINGSDIRECT A Stable Affirmed SEPTEMBER 11 2017 6 Copyright 2017 by Standard Poor s Financial Services LLC All rights reserved No content including ratings credit related analyses and data valuations model software or other application or output therefrom or any part thereof Content may be modified reverse engineered reproduced or distributed in any form by any means or stored in a database or retrieval system without the prior written permission of Standard Poor s Financial Services LLC or its affiliates collectively S P The Content shall not be used for any unlawful or unauthorized purposes S P and any third party 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