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Moffat County, Colorado Tri-State Generation and Transmission Association Inc.; CP; Rural Electric Coop <br />• The issuer credit rating (ICR) and senior secured debt rating on Tri-State; and <br />• The cooperative's $419 million 2003 series A and series B pass-through trust certificates that financed the <br />construction of the Springerville Unit 3 power plant through a lease structure. <br />The 'A' ratings reflect our views of the following credit strengths: <br />• Tri-State is a generation and transmission cooperative with what we consider a broad membership base. It has <br />long-term contracts with 43 wholesale members serving approximately 600,000 retail meters across a <br />200,000 -square -mile area in Wyoming, Nebraska, Colorado, and New Mexico. We believe that this breadth <br />contributes to revenue -stream diversity. However, residential customers' modest 30% share of energy sales, sparse <br />customer density, low service -area income levels, and customer concentrations in the natural gas and petroleum <br />sectors, temper these benefits. <br />• Energy sales data show that Tri -State's end-use customers' electricity consumption places it among the 10 largest <br />generation and transmission cooperatives in the U.S. <br />• Members have exclusive rights to sell retail electricity in their defined service territories. <br />• We calculated accrual basis fixed -charge coverage (FCC) levels of 1.2x in 2015 and 1.3x in 2016. We believe these <br />ratios reflect the benefits of 2014's debt reamortization and moderate rate increases. Our FCC calculation treats <br />capacity and tolling payments to other generation suppliers as debt service in lieu of operating expenses because we <br />view these payments as a vehicle for funding the suppliers' recovery of capital investments in generation. The ratios <br />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 <br />of the principal amortization and raises coverage relative to a fully amortizing structure. <br />• Using Tri -State's financial forecast, which we view as plausible, we calculate the utility's potential to maintain <br />coverage levels at 2015-2016 levels through 2021. The forecast reasonably assumes that member revenues will <br />represent about 90% of energy sales revenues, which is higher than recent years' 85%. Also, the utility forecasts that <br />member revenues will rise a moderate 3% over five years and debt balances will remain relatively stable at <br />approximately $3.5 billion as the capital program proceeds. <br />• The cooperative projects that its 2014 debt reamortization and the near-term annual debt service reductions will <br />leave a greater percentage of operating cash flow available for capital spending, which help contain debt <br />requirements. <br />S&P Global Ratings also considers these exposures in its analysis: <br />• There is evidence of residual member discord that dilutes the stability and predictability of the revenue stream and <br />that might frustrate strategic planning. For example, member Kit Carson Electric Cooperative severed its <br />relationship with Tri-State in 2016, paying an exit fee. Also, member Delta -Montrose Electric Association, <br />representing about 3% of sales, did not agree to extend its wholesale power contract to 2050 from 2040. <br />Nevertheless, 42 other members have extended contracts to 2050. <br />• We consider a high reliance on coal resources as exposing the utility and its customers to the costs of complying <br />with emissions regulations. Tri-State relied on owned and contracted coal-fired resources for 54% of its 2016 <br />electricity production. Purchases from coal -concentrated Basin Electric Power Cooperative add to the utility's level <br />of coal reliance. <br />• Tri -State's $3.4 billion debt portfolio includes $1.25 billion of bullet maturities. The balloon payments are due in <br />2024, 2040, 2044, and 2046; lack sinking funds; and defer to later years a sizable portion of the utility's financial <br />burden. These structures skew debt service coverage (DSC) and FCC ratios relative to those of cooperative utilities <br />that exclusively use amortizing debt. Our analysis assessed an imputed mortgage -style amortization for <br />comparability, which suggested that FCC would be about 5 basis points lower and still sound for the rating. <br />• The amount of the 2014 restructuring's annual debt service savings will decline each year. However, the utility <br />WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 11, 2017 3 <br />