Evaluating Debt Structures and Interest Rate Risk July 17, 2018
Table of Contents Section Page I. CCCA Overview 3 II. Capital Markets Update 7 III. Debt Portfolio Considerations 16 IV. Summary & Conclusions What Does This Mean For Your Coop? 32 2
Section 1 CCCA Overview
CC Capital Advisors CC Capital Advisors ( CCCA ) is a middle-market investment banking firm committed to delivering value-added capital markets, M&A and strategic advisory services to private and public companies Credentials More than a century of collective investment banking experience The Principals of CC Capital Advisors have executed 420+ deals since 1994 One of a select few investment banking firms with cooperative transaction expertise Dedicated to the Electric Cooperative Network, its members and other cooperative entities Advised transactions ranging in value from $10 million to $1 billion Represented clients nationally and internationally Closed numerous cross-border transactions across Europe, Asia and South America Licensed broker dealer & FINRA Member 4
Complete Cooperative Advisory CCCA has significant experience providing a full range of investment banking services to cooperatives Acquisition of IOU Service Territory and Municipal Systems Mergers & Acquisitions Merger of Cooperatives Divestiture of Non-Core Assets Capital Raising, Refinancing and Project Finance Capital Raising Credit Raising and Indentures Government Funding and Grant Programs Project Feasibility, Financing Alternatives, Renewable Energy and Fiber Strategic Advisory Business Valuations and Fairness Opinions Business Plans, Equity Management Plans and Strategic Plans 5
Select Transaction Experience CCCA has significant experience providing a full range of investment banking services for cooperatives and various energy and utility related projects $227,589,281 Has acquired Advised two investors in making a Series B Participating Preferred Stock Investment in Has entered into senior credit facilities Pending Pending Pending Advisory on fiber project feasibility, structure and financing Acquisition of IOU electric service territory Acquisition of muni electric service territory 6
Section 2 Capital Markets Update
Capital Markets Update Massive amount of dollars looking for a home Corporations hold a record $1.9 trillion of cash (1) Private equity dry powder of more than $961.5 billion (2) In Q1-2018, 55 private equity funds raised $36.6 billion (3) North America is the largest infrastructure market, raising more than $17.4 billion in 2017 (4) Unlisted infrastructure assets under management reached $418 billion in June of 2017 (5) $150 billion dry powder held by infrastructure firms (5) Over $65 billion was raised by the 69 closed funds in 2017 (5) Average infrastructure fund size in 2017 reached a record high of $992 million (5) 166 unlisted infrastructure funds in the market are targeting a record $122 billion in institutional capital (5) (1) As of May 2017, Source: S&P Global (2) As of June 2017, Source: Pitchbook (3) As of April 2018, Source: Pitchbook (4) As of May 2018, Source: Pitchbook (5) As of January 2018, Source: Preqin 8
Capital Markets Update ($ in billions) Total U.S. Infrastructure Fundraising $25 $20 $15 $10 $5 $- 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Pitchbook as of May 10, 2018 9
Capital Markets Update Alternative asset classes have become popular with many pension funds, seeking higher returns, as a means of narrowing funding gaps Sovereign wealth funds have increased exposure to investments via alternative asset funds Yield opportunity has precipitated evolution of infrastructure funds A handful of public vehicles available for yield-starved individual investors Approximately 8 infrastructure REITs Infrastructure REITs outperformed the other general REIT categories in 2017 with a return of 35.4% Cash Flow from Operations-Infrastructure REITs ($ in billions) $6 $5 $4 $3 $2 $1 $- 2014 2015 2016 2017 2018Q1 Source: Nareit as of 05/31/2018 10
Capital Markets Update Cooperative network has been discovered! Access to multiple financing alternatives and sources Challenge for electric coops is growth Optimizing Rate Structure in a rising interest rate environment Managing Contribution in Aid of Construction Explaining the cooperative model Historic time to be securing long-term financing Abundance of affordable capital Rising interest rate environment, albeit from historic lows Opportune time to review debt portfolio and/or establish an interest rate risk strategy Lower effective borrowing cost by pro-actively managing debt structure and terms Establish interest rate risk tolerance 11
Yield (%) U.S. Treasury Yield Comparison 3.50 3.00 2.50 Today Last Year 2.00 1.50 1.00 0.50 0.00 6 Month 1 Year 3 year 5 Year 10 Year 20 Year 30 Year Source: United States Treasury as of 07/11/2018 12
Flattening Yield Curve Inverted Yield Curve U.S. Treasury Yield Curve Gap between short-term interest rates and long-term interest rates is shrinking causing the yield curve to flatten If this trend continues, eventually long-term rates will fall below short-term rates causing an inversion Source: Federal Reserve Bank of St. Louis as 06/21/2018 13
Flattening Yield Curve Inverted Yield Curve Gap Between 2 Year and 10 Year Treasury Notes Every recession for the past 60 years has been preceded by an inverted yield curve The gap was.34% most recently in 2007 Source: Federal Reserve Bank of St. Louis as 06/21/2018 14
Spread (bps) Utility Interest Rate Spreads 200 180 160 140 120 100 80 60 40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Years A+ Utility A Utility A- Utility BBB+ Utility BBB Utility BBB- Utility Source: Bloomberg/Spread over like term treasuries as of 06/26/2018 15
Section 3 Debt Portfolio Considerations
Debt Portfolio Considerations Interest Rate Risk Ideal Financial Partners Lender Diversification Debt Portfolio Strategies Debt Service Coverage Rate Shock Repayment Schedules 17
Debt Strategy Considerations Approach and Objectives Reduce risk of rate shock from future debt service payments Mitigate revenue requirement impact by matching loan terms to useful life of assets Reduce future interest rate risk by tranching the yield curve Reduce long-term debt service costs Amortize and/or reprice certain current notes, considering any prepayment penalties Establishing interest rate risk guidelines and loan terms for future borrowings Regularly evaluate debt strategy and debt portfolio versus debt market environment 18
Debt Strategy Considerations Interest Rate Risk Profile Should be evaluated at the time of each loan draw Disciplined approach to establish and preserve maximum flexibility for both current and future debt Selecting interest rate tenors < 15 years and tranching the yield curve Mix determined based on existing portfolio rate maturities Market rates and the interest rate environment Focus on average interest rate term and percent for entire debt portfolio For example, draws could include interest rates of: Short-Term (variable to 3 years) Intermediate Term (4 to 7 years) Quasi-Long-Term (8 to 11 years) Long-Term (12 to 15 years) Match loan amortization term to useful life of assets Selecting a long-term fixed rate can be rationalized in the current interest rate environment 19
Debt Strategy Considerations Debt Financing Debt Structures Options: Level Debt Service (Baseline) Level Principal Payment Balloon Payments Debt Scenario: $50,000,000 loan 4.275% interest rate (30 year) 30 years Bullet or Serial Notes 20
Base Structure: Level Debt Service Payments and Cash Flow Requirements ($MM) $5 $4 $3 $2 $1 $- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year Principal Interest Cash Flow Required Total Interest Expense: $39.66 million Total Debt Service: $89.66 million Cash Flow Requirement at 1.5x DSC: $134.50 million 21
Alternative Structure #1: Level Principal Payment Payments and Cash Flow Requirements ($MM) $6 $5 $4 $3 $2 $1 $- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year Principal Interest Cash Flow Required Total Interest Expense: $33.13 million Total Debt Service: $83.13 million $6.53 million less than LDS Cash Flow Requirement at 1.5x DSC: $124.70 million 22
Alternative Structure #1: Level Principal Payment, Cont. Difference in Cash Flow Required ($MM) $2.00 $1.50 $1.00 $0.50 $- Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 $(0.50) $(1.00) $(1.50) $(2.00) Difference in Cash Flow vs. LDS Greater cash flow requirements in years 1 to 12 and less cash flow in years 13 to 30 Cash flow break-even in year 24 LPP requires $9.80 million less cash flow over 30 years 23
Alternative Structure #2: Balloon Payment Payments and Cash Flow Requirements ($MM) $80 $70 $60 $50 $40 $30 $20 $10 $- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year Principal Interest Cash Flow Required Total Interest Expense: $63.06 million $50 million principal payment at term and Total Debt Service: $113.06 million $23.39 million more than LDS Cash Flow Requirement at 1.5x DSC: $169.58 million 24
Alternative Structure #2: Balloon Payment, Cont. Difference in Cash Flow Required $80 $70 $60 $50 $40 $30 $20 $10 $- $(10) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year Difference in Cash Flow vs. LDS $76.60 million cash flow required at term Requires less cash flow for first 29 years In total, Balloon Payment requires $35.08 million more cash flow over 30 years 25
Alternative Structure #3: Bullet Notes Payments and Cash Flow Requirements ($MM) $8 $7 $6 $5 $4 $3 $2 $1 $- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Year Principal Interest Cash Flow Required Interest only through year 7 with principal payments of $2.17 million years 8-30 Total Interest Expense: $40.61 Total Debt Service: $90.61 million $0.95 million more than LDS Cash Flow Requirement at 1.5x DSC: $135.92 million 26
Alternative Structure #3: Bullet Notes, Cont. Difference in Cash Flow Required $6 $5 $4 $3 $2 $1 $- $(1) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 $(2) Year Difference in Cash Flow vs. LDS Bullet Note structure requires $1.42 million more cash flow over 30 years 27
Alternative Structure #3: Tranches Payments and Cash Flow Requirements ($MM) $6 $5 $4 $3 $2 $1 $- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Principal Interest Cash Flow Required Tranche A: 3.31% (3 yr) Tranche B: 3.52% (5 yr) Tranche C: 3.80% (8 yr) Tranche D: 4.08% (12 yr) Tranche E: 4.20% (15 yr) Total Payment: $88.69 million $0.97 million less than LDS Cash Flow Requirement at 1.5x DSC: $133.03 million Tranches are repriced at current 30 yr rate (4.28%) 28
Alternative Structure #3: Tranches, Cont. Difference in Cash Flow Required ($MM) $- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 $(0.05) $(0.10) $(0.15) $(0.20) $(0.25) $(0.30) Difference in Cash Flow vs. LDS Tranching results in $1.47 million less cash flow over 30 years Unquantifiable interest rate exposure creates a different interest rate risk profile 29
Debt Strategy Considerations Proposed Interest Rate Tenor ($MM) $250 $200 $150 Reprice & Amortize Notes and stagger interest rate tenor $100 $50 $0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Current Repriced Tranching the yield curve (tbd at the time of repricing) can reduce future interest rate risk 30
Debt Strategy Considerations Net Present Value of Considered Notes Net Present Value Note Pre-Refinance Post-Refinance Difference 9031 Note A $96,091,078 $96,000,000 $96,747,162 $97,000,000 $656,084 $1,000,000 $50MM Note Due B 2041 $46,864,005 $47,000,000 $45,115,298 $45,000,000 ($1,748,707) ($2,000,000) $40MM Note Due C 2038 $39,184,218 $39,000,000 $38,483,487 $38,000,000 ($700,731) ($1,000,000) $182,000,000 $180,000,000 ($2,000,000) Total $182,139,301 $180,345,947 ($1,793,354) The proposed refinancing results in a Net Present Value cash savings of $2.0 million in addition to the strategic benefits discussed herein Note: NPV shown is cash expenditures only. 31
Section 5 Conclusions What Does This Mean For Your Coop?
Summary & Conclusions No time like the present to review current debt portfolio and future borrowing needs Establish a disciplined interest rate risk strategy and debt amortization approach Cooperative stability has generated market appeal Historic interest rate environment, while it lasts.. Alternative financing sources and non-traditional capital partners must be knowledgeable of the coop landscape and market dynamics! 33
www.cccapitaladvisors.com bconway@cccapitaladvisors.com 816-360-8697 Country Club Financial Services, Inc. dba CC Capital Advisors, Member FINRA, SIPC 34