UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 10-Q

Transcription

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2016 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Commission File No TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, INC. (Exact name of registrant as specified in its charter) Colorado (State or other jurisdiction of incorporation or organization) to (I.R.S employer identification number) 1100 West 116 th Ave, Westminster, Colorado (Address of principal executive offices) (Zip Code) (303) (Registrant s telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer Accelerated Filer Non-Accelerated Filer (Do not check if a smaller reporting company) Smaller Reporting Company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No Indicate the number of shares outstanding of each of the registrant s classes of common stock, as of the latest practicable date. The registrant is a membership corporation and has no authorized or outstanding equity securities.

2 TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2016 PART I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements Consolidated Statements of Financial Position as of September 30, 2016 (unaudited) and December 31, Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2016 and 2015 (unaudited) 2 Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2016 and 2015 (unaudited) 3 Consolidated Statements of Equity - Nine Months Ended September 30, 2016 and 2015 (unaudited) 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2016 and 2015 (unaudited) 5 Notes to Unaudited Consolidated Financial Statements For the Three and Nine Months Ended September 30, 2016 and Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 27 Item 4. Controls and Procedures 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings 28 Item 4. Mine Safety Disclosures 28 Item 6. Exhibits 28 SIGNATURES i

3 FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q contains forward-looking statements. All statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate to occur in the future, including matters such as the timing of various regulatory and other actions, future capital expenditures, business strategy and development, construction or operation of facilities (often, but not always, identified through the use of words or phrases such as will likely result, are expected to, will continue, is anticipated, estimated, projection, target and outlook ) are forward-looking statements. Although we believe that in making these forward-looking statements our expectations are based on reasonable assumptions, any forward-looking statement involves uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. ii

4 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Tri-State Generation and Transmission Association, Inc. Consolidated Statements of Financial Position (dollars in thousands) September 30, 2016 December 31, 2015 ASSETS (unaudited) Property, plant and equipment Electric plant In service $ 5,651,861 $ 5,486,518 Construction work in progress 192, ,279 Total electric plant 5,844,110 5,702,797 Less allowances for depreciation and amortization (2,334,682) (2,240,732) Net electric plant 3,509,428 3,462,065 Other plant 232, ,957 Less allowances for depreciation, amortization and depletion (84,368) (73,471) Net other plant 148, ,486 Total property, plant and equipment 3,657,988 3,616,551 Other assets and investments Investments in other associations 125, ,686 Investments in and advances to coal mines 17,059 16,221 Restricted cash and investments 1,000 1,000 Intangible assets 20,141 25,634 Other noncurrent assets 12,660 12,139 Total other assets and investments 175, ,680 Current assets Cash and cash equivalents 167, ,587 Restricted cash and investments 4,730 9,530 Deposits and advances 31,467 21,673 Accounts receivable Members 89, ,216 Other accounts receivable 19,480 14,270 Coal inventory 58,544 59,277 Materials and supplies 88,903 85,501 Total current assets 460, ,054 Deferred charges Regulatory assets 413, ,081 Prepayment NRECA Retirement Security Plan 45,006 49,146 Other 128, ,535 Total deferred charges 587, ,762 Total assets $ 4,881,450 $ 4,823,047 EQUITY AND LIABILITIES Capitalization Patronage capital equity $ 977,425 $ 952,082 Accumulated other comprehensive income Noncontrolling interest 109, ,757 Total equity 1,086,992 1,061,428 Long-term debt 3,144,770 3,273,538 Total capitalization 4,231,762 4,334,966 Current liabilities Member advances 9,601 9,403 Accounts payable 82,586 96,098 Short-term borrowings 74,951 Accrued expenses 28,583 30,045 Accrued interest 51,914 34,332 Accrued property taxes 26,652 27,395 Current maturities of long-term debt 110,289 91,419 Total current liabilities 384, ,692 Deferred credits and other liabilities Regulatory liabilities 92,572 45,000 Deferred income tax liability 26,242 28,629 Intangible liabilities 4,159 6,221 Asset retirement obligations 64,009 55,215 Other 70,852 57,423 Total deferred credits and other liabilities 257, ,488 Accumulated postretirement benefit and postemployment obligations 7,278 6,901 Total equity and liabilities $ 4,881,450 $ 4,823,047 The accompanying notes are an integral part of these consolidated financial statements. 1

5 Tri-State Generation and Transmission Association, Inc. Consolidated Statements of Operations (unaudited) (dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, Operating revenues Member electric sales $ 326,251 $ 334,009 $ 873,537 $ 858,840 Non-member electric sales 35,478 30,394 92,266 95,242 Other 23,062 23,699 64,684 68, , ,102 1,030,487 1,022,406 Operating expenses Purchased power 105,751 91, , ,422 Fuel 67,839 65, , ,430 Production 51,699 55, , ,382 Transmission 41,383 39, , ,922 General and administrative 6,463 5,421 17,965 17,044 Depreciation, amortization and depletion 45,314 38, , ,317 Coal mining 10,174 7,096 25,845 23,039 Other 3,969 3,879 12,989 11, , , , ,060 Operating margins 52,199 81, , ,346 Other income Interest income 1,094 1,071 3,227 3,241 Capital credits from cooperatives 1, ,800 5,995 Other income ,599 2,659 3,063 2,633 11,626 11,895 Interest expense, net of amounts capitalized 37,041 35, , ,919 Income taxes Net margins including noncontrolling interest 17,871 48,199 38,122 74,322 Net (income) loss attributable to noncontrolling interest (132) 103 (313) 390 Net margins attributable to the Association $ 17,739 $ 48,302 $ 37,809 $ 74,712 The accompanying notes are an integral part of these consolidated financial statements. 2

6 Tri-State Generation and Transmission Association, Inc. Consolidated Statements of Comprehensive Income (unaudited) (dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, Net margins including noncontrolling interest $ 17,871 $ 48,199 $ 38,122 $ 74,322 Other comprehensive income (loss): Unrealized gain (loss) on securities available for sale 36 (89) 35 (112) Reclassification adjustment for actuarial (gain) loss on postretirement benefit obligation included in net income (23) 9 (68) 26 Income tax expense related to components of other comprehensive income (loss) Other comprehensive income (loss) 13 (80) (33) (86) Comprehensive income including noncontrolling interest 17,884 48,119 38,089 74,236 Net comprehensive (income) loss attributable to noncontrolling interest (132) 103 (313) 390 Comprehensive income attributable to the Association $ 17,752 $ 48,222 $ 37,776 $ 74,626 The accompanying notes are an integral part of these consolidated financial statements. 3

7 Tri-State Generation and Transmission Association, Inc. Consolidated Statements of Equity (unaudited) (dollars in thousands) Nine Months Ended September 30, Patronage capital equity at beginning of period $ 952,082 $ 908,669 Net margins attributable to the Association 37,809 74,712 Retirement of patronage capital (12,466) Patronage capital equity at end of period 977, ,381 Accumulated other comprehensive income (loss) at beginning of period 589 (828) Unrealized gain (loss) on securities available for sale 35 (112) Reclassification adjustment for actuarial (gain) loss on postretirement benefit obligation included in net income (68) 26 Accumulated other comprehensive income (loss) at end of period 556 (914) Noncontrolling interest at beginning of period 108, ,302 Net income (loss) attributable to noncontrolling interest 313 (390) Equity distribution to noncontrolling interest (59) (57) Noncontrolling interest at end of period 109, ,855 Total equity at end of period $ 1,086,992 $ 1,091,322 The accompanying notes are an integral part of these consolidated financial statements. 4

8 Tri-State Generation and Transmission Association, Inc. Consolidated Statements of Cash Flows (unaudited) (dollars in thousands) Nine Months Ended September 30, Operating activities Net margins including noncontrolling interest $ 38,122 $ 74,322 Adjustments to reconcile net margins to net cash provided by operating activities: Depreciation, amortization and depletion 126, ,317 Amortization of intangible asset 5,493 5,493 Amortization of NRECA Retirement Security Plan prepayment 4,029 4,140 Amortization of debt issuance costs 1,436 1,400 Deferred membership withdrawal income 47,572 Capital credit allocations from cooperatives and income from coal mines over refund distributions (2,546) (3,698) Change in restricted cash and investments (121) 29,148 Changes in operating assets and liabilities: Accounts receivable (865) 21,026 Coal inventory 733 (29,170) Materials and supplies (3,402) (4,132) Accounts payable and accrued expenses (4,360) (10,845) Accrued interest 17,582 16,565 Accrued property taxes (744) (112) Other deferred credits - BNSF settlement (29,381) Other (2,471) 11,084 Net cash provided by operating activities 226, ,157 Investing activities Purchases of plant (150,336) (217,929) Changes in deferred charges (7,390) 1,495 Proceeds from other investments Net cash used in investing activities (157,413) (216,027) Financing activities Changes in Member advances (980) (5,134) Payments of long-term debt (416,532) (101,772) Proceeds from issuance of debt 307, ,185 Increase in short-term borrowings, net 74,951 Retirement of patronage capital (15,345) (4,213) Proceeds from investment in securities pledged as collateral 4,647 4,222 Other (231) 323 Net cash provided by (used in) financing activities (46,490) 123,611 Net increase in cash and cash equivalents 22, ,741 Cash and cash equivalents beginning 144,587 92,468 Cash and cash equivalents ending $ 167,232 $ 195,209 Supplemental cash flow information: Cash paid for interest $ 101,066 $ 101,480 Cash paid for income taxes $ 700 $ Supplemental disclosure of noncash investing and financing activities: Change in plant expenditures included in accounts payable $ (4,974) $ (1,152) The accompanying notes are an integral part of these consolidated financial statements. 5

9 Tri-State Generation and Transmission Association, Inc. Notes to Unaudited Consolidated Financial Statements For the Three and Nine Months Ended September 30, 2016 and 2015 NOTE 1 PRESENTATION OF FINANCIAL INFORMATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ( GAAP ) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission ( SEC ). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. The results of operations for the three and nine months ended September 30, 2016 and 2015 are not necessarily indicative of the results that may be expected for an entire year or any other period. On September 1, 2016, we announced that the owners of Craig Generating Station Unit 1 reached an agreement with the Colorado Department of Public Health and Environment, U.S. Environmental Protection Agency, WildEarth Guardians and the National Parks Conservation Association to revise the Colorado Visibility and Regional Haze State Implementation Plan ( SIP ). Under the proposed revision to the SIP, the 427-megawatt Craig Generating Station Unit 1, which is part of a three-unit, coal-fired generating facility in Craig, Colorado, will be retired by December 31, The retirement date was previously estimated to be December 31, We are the operator of Craig Generating Station and own 24 percent of Craig Generating Station Unit 1. Craig Generating Station Unit 2 and Unit 3 will continue to operate. Our share of Craig Generating Station Unit 1 is 102 megawatts with a net book value of $28.6 million as of September 30, The shortened life increased monthly depreciation expense in the amount of $186,000 beginning September 1, As part of the above mentioned agreement on proposed revisions to the SIP, we intend to retire the Nucla Generating Station by December 31, The retirement date was previously estimated to be December 31, We are the operator and sole owner of the 100 megawatt, coal-fired Nucla Generating Station with a net book value of $62.8 million as of September 30, The shortened life increased monthly depreciation expense in the amount of $666,000 beginning September 1, 2016 and increased the asset retirement obligation in the amount of $2.8 million as of September 30, The New Horizon Mine, which supplies coal to Nucla Generating Station, will cease coal production with the retirement of Nucla Generating Station. Reclamation efforts at the New Horizon Mine will continue. Basis of Consolidation Our consolidated financial statements include the accounts of Tri-State Generation and Transmission Association, Inc., our wholly-owned and majority-owned subsidiaries and certain variable interest entities for which we or our subsidiaries are the primary beneficiaries. See Note 11 Variable Interest Entities. Our consolidated financial statements also include our undivided interests in jointly owned facilities. All significant intercompany balances and transactions have been eliminated in consolidation. Jointly Owned Facilities We own undivided interests in three jointly owned generation facilities that are operated by the operating agent of each facility under joint facility ownership agreements with other utilities as tenants in common. These projects include the Yampa Project (operated by us), the Missouri Basin Power Project ( MBPP ) (operated by Basin Electric Power Cooperative ( Basin )) and the San Juan Project (operated by Public Service Company of New Mexico). Each participant in these agreements receives a portion of the total output of the generation facilities, which approximates its percentage ownership. Each participant provides its own financing for its share of each facility and accounts for its share of the cost of each facility. The operating agent for each of these projects allocates the fuel and other operating expenses 6

10 to each participant based upon its share of the use of the facility. Therefore, our share of the plant asset cost, interest, depreciation and other operating expenses is included in our consolidated financial statements. Our share in each jointly owned facility is as follows as of September 30, 2016 (dollars in thousands): Electric Construction Tri-State Plant in Accumulated Work In Share Service Depreciation Progress Yampa Project - Craig Station Units 1 and % $ 345,104 $ 231,067 $ 36,420 MBPP - Laramie River Station % 399, ,476 13,370 San Juan Project San Juan Unit % 82,688 69,290 Total $ 827,166 $ 592,833 $ 49,790 NOTE 2 ACCOUNTING FOR RATE REGULATION We are subject to the accounting requirements related to regulated operations. In accordance with these accounting requirements, some revenues and expenses have been deferred at the discretion of our Board of Directors ( Board ), which has budgetary and rate-setting authority, if it is probable that these amounts will be refunded or recovered through future rates. Regulatory assets are costs that we expect to recover from our member distribution systems ( Members ) through rates approved by our Board in accordance with our rate policy. Regulatory liabilities represent probable future reductions in rates associated with amounts that are expected to be refunded to our Members based on rates approved by our Board in accordance with our rate policy. We recognize regulatory assets and liabilities as expenses or as a reduction in expenses concurrent with their recovery in rates. Regulatory assets and liabilities are as follows (dollars in thousands): September 30, December 31, Regulatory assets Deferred income tax expense (1) $ 26,242 $ 28,629 Deferred prepaid lease expense- Craig 3 Lease (2) 11,328 16,183 Deferred prepaid lease expense- Springerville 3 Lease (3) 91,160 92,878 Goodwill J.M. Shafer (4) 58,404 60,541 Goodwill Colowyo Coal (5) 40,552 41,327 Deferred debt prepayment transaction costs (6) 168, ,444 Interest rate swaps (7) 17,041 Other 79 Total regulatory assets 413, ,081 Regulatory liabilities Deferred revenues (8) 45,000 45,000 Membership withdrawal (9) 47,572 Total regulatory liabilities 92,572 45,000 Net regulatory asset $ 321,128 $ 370,081 (1) A regulatory asset or liability associated with deferred income taxes generally represents the future increase or decrease in income taxes payable that will be received or settled through future rate revenues. (2) Deferral of loss on acquisition related to the Craig Generating Station Unit 3 prepaid lease expense upon acquisitions of equity interests in 2002 and The regulatory asset for the deferred prepaid lease expense is being amortized to depreciation, amortization and depletion expense in the amount of $6.5 million annually through the remaining original life of the lease ending in 2018 and recovered from our Members in rates. (3) Deferral of loss on acquisition related to the Springerville Generating Station Unit 3 ( Springerville Unit 3 ) prepaid lease expense upon acquiring a controlling interest in the Springerville Unit 3 Partnership LP ( Springerville Partnership ) in The regulatory asset for the deferred prepaid lease expense is being amortized to depreciation, 7

11 amortization and depletion expense in the amount of $2.3 million annually through the 47-year period ending in 2056 and recovered from our Members in rates. (4) Represents goodwill related to our acquisition of Thermo Cogeneration Partnership, LP ( TCP ) in December Goodwill is being amortized to depreciation, amortization and depletion expense in the amount of $2.8 million annually through the 25-year period ending in 2036 and recovered from our Members in rates. (5) Represents goodwill related to our acquisition of Colowyo Coal Company LP ( Colowyo Coal ) in December Goodwill is being amortized to depreciation, amortization and depletion expense in the amount of $1.0 million annually through the 44-year period ending in 2056 and recovered from our Members in rates. (6) Represents transaction costs that we incurred related to the prepayment of our long-term debt in These costs are being amortized to depreciation, amortization and depletion expense in the amount of $8.6 million annually over the 21.4-year average life of the new debt issued and recovered from our Members in rates. (7) Represents deferral of the unrealized loss related to the change in fair value of forward starting interest rate swaps that were entered into in order to hedge interest rates on anticipated future borrowings. Upon settlement of these interest rate swaps, the realized gain or loss will be amortized to interest expense over the term of the associated long-term debt borrowing. See Note 6 Long-Term Debt and Note 10 Fair Value. (8) Represents deferral of the recognition of $10 million of non-member electric sales revenue received in 2008 and $35 million of non-member electric sales revenue received in These deferred non-member electric sales revenues will be refunded to Members through reduced rates when recognized in non-member electric sales revenue in future periods. (9) Represents the deferral of the recognition of other income of $47.6 million recorded in connection with the June 30, 2016 withdrawal of Kit Carson Electric Cooperative, Inc. ( KCEC ) from membership in us pursuant to the Membership Withdrawal Agreement ( Withdrawal Agreement ). The Withdrawal Agreement provided for the termination of the wholesale electric service contract between us and KCEC that extended through 2040 and the withdrawal of KCEC from membership in us. As part of the Withdrawal Agreement, we received $37 million net cash, which consisted of $49.5 million as an early termination fee for withdrawing from membership in us offset by $12.5 million for the retirement of KCEC s patronage capital. This resulted in $47.6 million in other income, which was deferred by our Board. This deferred membership withdrawal income will be refunded to Members through reduced rates when recognized in other income in future periods. NOTE 3 INVESTMENTS IN OTHER ASSOCIATIONS Investments in other associations include investments in the patronage capital of other cooperatives (accounted for using the cost method) and other required investments in the organizations. Under this method, our investment in a cooperative increases when a cooperative allocates patronage capital credits to us and it decreases when we receive a cash retirement of the allocated capital credits from the cooperative. A cooperative allocates its patronage capital credits to us based upon our patronage (amount of business done) with the cooperative. NOTE 4 RESTRICTED CASH AND INVESTMENTS Restricted cash and investments represent funds designated by our Board for specific uses and funds restricted by contract or other legal reasons. A portion of the funds is for the payment of debt within one year and funds restricted by contract that are expected to be settled within one year. These funds are therefore classified as current on our consolidated statements of financial position. The other funds are for funds restricted by contract or other legal reasons that are expected to be settled beyond one year. These funds are classified as noncurrent and are included in other assets and investments on our consolidated statements of financial position. We have investments in U.S. Treasury Notes pledged as collateral in connection with the in-substance defeasance for the principal outstanding and future interest payments on the Coal Contract Receivable Collateralized Bonds ( Colowyo Bonds ). The balances in these investments are described as investments in securities pledged as collateral in the table below. As of September 30, 2016, the entire $3.7 million balance of the defeasance investment is for Colowyo Bond debt payments due within one year and is, therefore, a current asset on our consolidated statements of financial position. The Colowyo Bonds mature in November

12 Restricted cash and investments are as follows (dollars in thousands): September 30, December 31, Investments in securities pledged as collateral $ 3,749 $ 8,671 Funds restricted by contract Restricted cash and investments - current 4,730 9,530 Funds restricted by contract 1,000 1,000 Restricted cash and investments - noncurrent 1,000 1,000 Total restricted cash and investments $ 5,730 $ 10,530 NOTE 5 OTHER DEFERRED CHARGES We make expenditures for preliminary surveys and investigations for the purpose of determining the feasibility of contemplated generation and transmission projects. If construction results, the preliminary survey and investigation expenditures will be reclassified to electric plant - construction work in progress. If the work is abandoned, the related preliminary survey and investigation expenditures will be charged to the appropriate operating expense account or the expense could be deferred as a regulatory asset to be recovered from our Members in rates subject to approval by our Board, which has budgetary and rate-setting authority. Included in other deferred charges were preliminary surveys and investigations of $110.2 million and $107.1 million as of September 30, 2016 and December 31, 2015, respectively. These amounts were primarily comprised of expenditures for the Holcomb Station Project of $90.3 million and $86.7 million as of September 30, 2016 and December 31, 2015, respectively. We make advance payments to the operating agents of jointly owned facilities to fund our share of costs expected to be incurred under each project including MBPP Laramie River Station, Yampa Project Craig Station Units 1 and 2, San Juan Project San Juan Unit 3. We also make advance payments to the operating agent of Springerville Unit 3. Included in other deferred charges were advance payments of $19.1 million and $11.5 million as of September 30, 2016 and December 31, 2015, respectively. NOTE 6 LONG-TERM DEBT The mortgage notes payable and pollution control revenue bonds are secured on a parity basis by a Master First Mortgage Indenture, Deed of Trust and Security Agreement except for two unsecured notes in the aggregate amount of $50.9 million as of September 30, Substantially all our assets, rents, revenues and margins are pledged as collateral. The Springerville certificates are secured by the assets of Springerville Unit 3. The Colowyo Bonds are secured by funds deposited with the trustee as part of the in-substance defeasance and an unconditional guarantee by us. All long-term debt contains certain restrictive financial covenants, including a debt service ratio requirement and equity to capitalization ratio requirement. We have a secured revolving credit facility with Bank of America, N.A. and CoBank, ACB as Joint Lead Arrangers in the amount of $750 million ( Revolving Credit Agreement ) that expires on July 26, We had no outstanding borrowings at September 30, 2016 and $271 million at December 31, There is a 364-day, direct pay letter of credit issued under the Revolving Credit Agreement and provided by Bank of America, N.A. for the $46.8 million Moffat County, CO, Variable Rate Demand Pollution Control Revenue Refunding Bonds, Series Debt issuance costs are accounted for as a direct deduction of the associated long-term debt carrying amount consistent with the accounting for debt discounts and premiums. Debt issuance costs are amortized to interest expense using an effective interest method over the life of the respective debt. 9

13 Long-term debt consists of the following (dollars in thousands): September 30, December 31, Total debt $ 3,267,146 $ 3,371,679 Less debt issuance costs (22,751) (21,201) Less debt discounts (10,619) (8,739) Plus debt premiums 21,283 23,218 Total debt adjusted for discounts, premiums and debt issuance costs 3,255,059 3,364,957 Less current maturities (110,289) (91,419) Long-term debt $ 3,144,770 $ 3,273,538 We are exposed to certain risks in the normal course of operations in providing a reliable and affordable source of wholesale electricity to our Members. These risks include interest rate risk, which represents the risk of increased operating expenses and higher rates due to increases in interest rates related to anticipated future long-term borrowings. To manage this exposure, we have entered into forward starting interest rate swaps to hedge a portion of our future longterm debt interest rate exposure. We anticipate settling these swaps in conjunction with the issuance of future long-term debt. See Note 2 Accounting for Rate Regulation and Note 10 Fair Value. The terms of the interest rate swap contracts are as follows (dollars in thousands): Notional Fixed Benchmark Interest Effective Maturity Amount Rate (1) Rate (2) Date Date Interest rate swap - April 2016 $ 90, % 30 year - LIBOR April 2019 April 2049 Interest rate swap - June , % 30 year - LIBOR June 2019 June 2049 (1) We will pay. (2) We will receive. $ 170,000 NOTE 7 SHORT-TERM BORROWINGS Commercial Paper We established a commercial paper program in May 2016 under which we issue unsecured commercial paper in aggregate amounts not exceeding the commercial paper sublimit under our Revolving Credit Agreement, which is the lesser of $500 million or the amount available under our Revolving Credit Agreement. The commercial paper issuances are used to provide an additional financing source for our short-term liquidity needs. The maturities of the commercial paper issuances vary, but may not exceed 397 days from the date of issue. The commercial paper notes are classified as current and are included in current liabilities as short-term borrowings on our consolidated statements of financial position. Commercial paper consisted of the following (dollars in thousands): September 30, December 31, Commercial paper outstanding, net of discounts $ 74,951 $ Weighted average interest rate 0.73 % N/A 10

14 NOTE 8 ASSET RETIREMENT OBLIGATIONS We account for current obligations associated with the future retirement of tangible long-lived assets in accordance with the accounting guidance relating to asset retirement and environmental obligations. This guidance requires that legal obligations associated with the retirement of long-lived assets be recognized at fair value at the time the liability is incurred and capitalized as part of the related long-lived asset. Over time, the liability is adjusted to its present value by recognizing accretion expense and the capitalized cost of the long-lived asset is depreciated in a manner consistent with the depreciation of the underlying physical asset. In the absence of quoted market prices, we determine fair value by using present value techniques in which estimates of future cash flows associated with retirement activities are discounted using a credit adjusted risk-free rate including a market risk premium. Upon settlement of an asset retirement obligation, we will apply payment against the estimated liability and incur a gain or loss if the actual retirement costs differ from the estimated recorded liability. These liabilities are included in asset retirement obligations. Coal mines: We have asset retirement obligations for the final reclamation costs and post-reclamation monitoring related to the Colowyo Mine, the New Horizon Mine, and the Fort Union Mine. Fossil steam generation: We, including our undivided interest in jointly owned facilities, have asset retirement obligations related to equipment, dams, ponds, wells and underground storage tanks at the fossil steam generating stations. Transmission: We have an asset retirement obligation to remove a certain transmission line and related substation assets resulting from an agreement to relocate the line. Aggregate carrying amounts of asset retirement obligations are as follows (dollars in thousands): September 30, December 31, Asset retirement obligation at beginning of period $ 55,215 $ 53,754 Liabilities incurred 5,453 1,802 Liabilities settled (1,069) (3,028) Accretion expense 2,113 3,324 Change in cash flow estimate 2,297 (637) Asset retirement obligation at end of period $ 64,009 $ 55,215 We also have asset retirement obligations with indeterminate settlement dates. These are made up primarily of obligations attached to transmission and other easements that are considered by us to be operated in perpetuity and therefore the measurement of the obligation is not possible. A liability will be recognized in the period in which sufficient information exists to estimate a range of potential settlement dates as is needed to employ a present value technique to estimate fair value. NOTE 9 INCOME TAXES We are a taxable cooperative subject to federal and state taxation. As a taxable electric cooperative, we are allowed a tax exclusion for margins allocated as patronage capital. We utilize the liability method of accounting for income taxes. Accordingly, changes in deferred tax assets or liabilities result in the establishment of a regulatory asset or liability. A regulatory asset or liability associated with deferred income taxes generally represents the future increase or decrease in income taxes payable that will be settled or received through future rate revenues. Our consolidated statements of operations include income tax expense of $350,000 for the three months ended September 30, 2016 and no income tax expense or benefit for the comparable period in Income tax expense was $700,000 for the nine months ended September 30, 2016 and there was no income tax expense or benefit for the comparable period in

15 NOTE 10 FAIR VALUE Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal or in the most advantageous market when no principal market exists. The fair value measurement accounting guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability (market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not under duress). In considering market participant assumptions in fair value measurements, a three-tier fair value hierarchy for measuring fair value was established which prioritizes the inputs used in measuring fair value as follows: Level 1 inputs are based upon quoted prices for identical instruments traded in active (exchange-traded) markets. Valuations are obtained from readily available pricing sources for market transactions (observable market data) involving identical assets or liabilities. Level 2 inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques (such as option pricing models, discounted cash flow models) for which all significant assumptions are observable in the market. Level 3 inputs consist of unobservable market data which is 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 value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Marketable Securities We hold marketable securities in connection with the directors and executives elective deferred compensation plans which consist of investments in stock funds, bond funds and money market funds. These securities are classified as available-for-sale and are measured at fair value on a recurring basis. The estimated fair value of the investments is based upon their active market value (Level 1 inputs) and is included in other noncurrent assets on our consolidated statements of financial position. The unrealized gains are reported as a component of accumulated other comprehensive income. The amortized cost and fair values of our marketable securities are as follows (dollars in thousands): As of September 30, 2016 As of December 31, 2015 Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value Marketable securities $ 886 $ 1,050 $ 1,022 $ 1,151 Cash Equivalents We invest portions of our cash and cash equivalents in commercial paper, money market funds, and other highly liquid investments. The fair value of these investments approximates our cost basis in the investments. In aggregate, the fair value was $40.0 million as of September 30, 2016 and $75.1 million as of December 31, 2015, respectively. Debt The fair values of debt were estimated using discounted cash flow analyses based on our current incremental borrowing rates for similar types of borrowing arrangements. These valuation assumptions utilize observable inputs based on market data obtained from independent sources and are therefore considered Level 2 inputs (quoted prices for similar 12

16 assets, liabilities (adjusted) and market corroborated inputs). The principal amounts and fair values of our debt are as follows (dollars in thousands): As of September 30, 2016 As of December 31, 2015 Principal Estimated Principal Estimated Amount Fair Value Amount Fair Value Total debt $ 3,267,146 $ 3,719,629 $ 3,371,679 $ 3,616,946 Interest Rate Swaps We entered into forward starting interest rate swaps in 2016 to hedge a portion of our future long-term debt interest rate expense. See Note 6 Long-Term Debt. These interest rate swaps are derivative instruments in accordance with ASC 815, Derivatives and Hedging, and are recorded at fair value on a recurring basis. The estimated fair value of these interest rate swaps utilizes observable inputs based on market data obtained from independent sources and are therefore considered Level 2 inputs (quoted prices for similar assets, liabilities (adjusted) and market corroborated inputs) and are included in other deferred credits and other liabilities on our consolidated statements of financial position. At September 30, 2016, the fair value of our interest rate swaps was an unrealized loss of $17.0 million, which was deferred in accordance with our regulatory accounting. See Note 2 Accounting for Rate Regulation. NOTE 11 VARIABLE INTEREST ENTITIES The following is a description of our financial interests in variable interest entities that we consider significant. This includes an entity for which we are determined to be the primary beneficiary and therefore consolidate and also entities for which we are not the primary beneficiary and therefore do not consolidate. Consolidated Variable Interest Entity Springerville Partnership: We own a 51 percent equity interest, including the 1 percent general partner equity interest, in the Springerville Partnership, which is the 100 percent owner of Springerville Unit 3 Holding LLC ( Owner Lessor ) of the Springerville Unit 3. We, as general partner, have the full, exclusive and complete right, power and discretion to operate, manage and control the affairs of the Springerville Partnership and take certain actions necessary to maintain the Springerville Partnership in good standing without the consent of the limited partners. Additionally, the Owner Lessor has historically not demonstrated an ability to finance its activities without additional financial support. The financial support is provided by our remittance of lease payments in order to permit the Owner Lessor, the holder of the Springerville Unit 3 assets, to pay the debt obligations and equity returns of the Springerville Partnership. We have the primary risk (expense) exposure in operating the Springerville Unit 3 assets and are responsible for 100 percent of the operation, maintenance and capital expenditures of Springerville Unit 3 and the decisions related to those expenditures including budgeting, financing and dispatch of power. Based on all these facts, it was determined that we are the primary beneficiary of the Owner Lessor. Therefore, the Springerville Partnership and Owner Lessor have been consolidated by us. Our consolidated statements of financial position include the Springerville Partnership s net electric plant of $837.5 million and $853.3 million at September 30, 2016 and December 31, 2015, respectively, the long-term debt of $472.6 million and $511.0 million at September 30, 2016 and December 31, 2015, respectively, accrued interest associated with the long-term debt of $5.4 million and $14.3 million at September 30, 2016 and December 31, 2015, respectively, and the 49 percent noncontrolling equity interest in the Springerville Partnership of $109.0 million and $108.8 million at September 30, 2016 and December 31, 2015, respectively. Our consolidated statements of operations include the Springerville Partnership s depreciation and amortization expense of $5.3 million for the three months ended September 30, 2016 and the comparable period in Our consolidated statements of operations also include interest expense of $7.6 million for the three months ended September 30, 2016 and $8.0 million for the comparable period in Our consolidated statements of operations include the Springerville Partnership s depreciation and amortization of $15.8 million for the nine months ended September 30, 2016 and the comparable period in Our consolidated statements of operations also include interest expense of $22.8 million for 13

17 the nine months ended September 30, 2016 and $24.3 million for the comparable period in The net income and losses attributable to the 49 percent noncontrolling equity interest in the Springerville Partnership are reflected on our consolidated statements of operations. The revenue associated with the Springerville Partnership lease has been eliminated in consolidation. Income, losses and cash flows of the Springerville Partnership are allocated to the general and limited partners based on their equity ownership percentages. Unconsolidated Variable Interest Entities Western Fuels Association, Inc. ( WFA ): WFA is a non-profit membership corporation organized for the purpose of acquiring and supplying fuel resources to its members, which includes us. WFA supplies fuel to MBPP for the use of the Laramie River Station through its ownership in Western Fuels-Wyoming. We also receive coal supplies directly from WFA for the Escalante Generating Station in New Mexico and spot coal for the Springerville Unit 3 in Arizona. The pricing structure of the coal supply agreements with WFA is designed to recover the mine operating costs of the mine supplying the coal and therefore the coal sales agreements provide the financial support for the mine operations. There isn t sufficient equity at risk for WFA to finance its activities without additional financial support. Therefore, WFA is considered a variable interest entity in which we have a variable interest. The power to direct the activities that most significantly impact WFA s economic performance (acquiring and supplying fuel resources) is held by the members who are represented on the WFA board of directors whose actions require joint approval. Therefore, since there is shared power over the significant activities of WFA, we are not the primary beneficiary of WFA and the entity is not consolidated. Our investment in WFA, accounted for using the cost method, was $2.1 million at September 30, 2016 and $2.3 million at December 31, 2015, and is included in investments in other associations. Western Fuels Wyoming ( WFW ): WFW, the owner and operator of the Dry Fork Mine in Gillette, WY, was organized for the purpose of acquiring and supplying coal, through long-term coal supply agreements, to be used in the production of electric energy at the Laramie River Station (owned by the participants of MBPP) and at the Dry Fork Station (owned by Basin). WFA owns 100 percent of the class AA shares and 75 percent of the class BB shares of WFW, while the participants of MBPP (of which we have a percent undivided interest) own the remaining 25 percent of class BB shares of WFW. The pricing structure of the coal supply agreements is designed to recover the costs of production of the Dry Fork Mine and therefore the coal supply agreements provide the financial support for the operation of the Dry Fork Mine. There isn t sufficient equity at risk at WFW for it to finance its activities without additional financial support. Therefore, WFW is considered a variable interest entity in which we have a variable interest. The power to direct the activities that most significantly impact WFW s economic performance (which includes operations, maintenance and reclamation activities) is shared with the equity interest holders since each member has representation on the WFW board of directors whose actions require joint approval. Therefore, we are not the primary beneficiary of WFW and the entity is not consolidated. Trapper Mining, Inc. ( Trapper Mining ): Trapper Mining is a cooperative organized for the purpose of mining, selling and delivering coal from the Trapper Mine to the Craig Generating Station Units 1 and 2 through long-term coal supply agreements. Trapper Mining is jointly owned by some of the participants of the Yampa Project. We have a percent cooperative member interest in Trapper Mining. The pricing structure of the coal supply agreements is designed to recover the costs of production of the Trapper Mine and therefore the coal supply agreements provide the financial support for the operation of the Trapper Mine. There isn t sufficient equity at risk for Trapper Mining to finance its activities without the additional financial support. Therefore, Trapper Mining is considered a variable interest entity in which we have a variable interest. The power to direct the activities that most significantly impact Trapper Mining s economic performance (which includes operations, maintenance and reclamation activities) is shared with the cooperative members since each member has representation on the Trapper Mining board of directors whose actions require joint approval. Therefore, we are not the primary beneficiary of Trapper Mining and the entity is not consolidated. We record our investment in Trapper Mining using the equity method. Our membership interest in Trapper Mining was $14.4 million at September 30, 2016 and $14.1 million at December 31, 2015 and is recorded within investments in and advances to coal mines. 14

18 NOTE 12 LEGAL There are no new material litigation or proceedings pending or threatened against us or any material developments in any material existing pending litigation or proceedings. For further discussion regarding legal proceedings, see our Annual Report on Form 10-K for the year ended December 31, 2015 Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Notes to Consolidated Financial Statements Note 12-Commiments and Contingencies Legal. NOTE 13 NEW ACCOUNTING PRONOUNCEMENTS In August 2016, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) , Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Payments. This amendment provides specific guidance on certain cash flow presentation and classification issues in order to reduce diversity in practice on the statement of cash flows. The issues that primarily relate to us are the classification of proceeds from the settlement of insurance claims and distributions received from equity method investees. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The guidance is applied using a full retrospective transition method. We are currently evaluating the impact that this amendment will have on our statement of cash flows. In February 2016, the FASB issued ASU , Leases (Topic 842). This amendment requires a lessee to recognize substantially all leases (whether operating or finance leases) on the balance sheet as a right-of-use asset and an associated lease liability. Short-term leases of 12 months or less are excluded from this amendment. A right-of-use asset represents a lessee s right to use (control the use of) the underlying asset for the lease term. A lease liability represents a lessee s liability to make lease payments. The right-of-use asset and the lease liability are initially measured at the present value of the lease payments over the lease term. For finance leases, the lessee subsequently recognizes interest expense and amortization of the right-of-use asset, similar to accounting for capital leases under current GAAP. For operating leases, the lessee subsequently recognizes straight-line lease expense over the life of the lease. Lessor accounting remains substantially the same as that applied under current GAAP. This amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The guidance is to be applied using a modified retrospective transition method with the option to elect a package of practical expedients. We are currently evaluating the impact of this amendment on our financial position and results of operations. In January 2016, the FASB issued ASU , Financial Instruments - Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities. This amendment requires an entity to measure investments in equity securities, except those that result in consolidation or are accounted for under the equity method of accounting, at fair value with changes in fair value recognized in net income. For equity investments that do not have readily determinable fair value and don t qualify for the existing practical expedient in ASC 820, Fair Value Measurements, to estimate fair value using the net asset value per share of the investment, the guidance provides a new measurement alternative. Entities may choose to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. This amendment also affects financial liabilities using the fair value option and the presentation and disclosure requirements for financial instruments. Also, an entity should present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application by public business entities to financial statements of fiscal years or interim periods that have not yet been issued or, by all other entities, that have not yet been made available for issuance are permitted as of the beginning of the fiscal year of adoption. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption of the update. We are currently evaluating the impact of this amendment on our financial position and results of operations. 15