10-Q 1 tris-20180930x10q.htm 10-Q tris_Current folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


 

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, 2018

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to

 

Commission File No. 333-212006

 

TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, INC.

(Exact name of registrant as specified in its charter)

 

Colorado

84-0464189

(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification
No.)

 

 

1100 West 116th Avenue

 

Westminster, Colorado

80234

(Address of principal executive offices)

(Zip Code)

 

(303) 452-6111

(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     (Note: The registrant is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), but voluntarily files reports with the Securities and Exchange Commission. The registrant has filed all Exchange Act reports for the preceding 12 months (or for such shorter period that the registrant was required to file such reports)).

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer     Accelerated filer     Non-accelerated filer     Smaller reporting company     Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

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 issuer’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.

 

 


 

TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2018

 

 

 

 

 

    

Page Number

PART I.  FINANCIAL INFORMATION 

 

Item 1. 

Financial Statements

 

 

Consolidated Statements of Financial Position as of September 30, 2018 (unaudited) and December 31, 2017

1

 

Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)

2

 

Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)

3

 

Consolidated Statements of Equity – Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)

4

 

Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2018 and 2017 (unaudited)

5

 

Notes to Unaudited Consolidated Financial Statements

6

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4. 

Controls and Procedures

30

PART II.  OTHER INFORMATION 

 

Item 1. 

Legal Proceedings

30

Item 4. 

Mine Safety Disclosures

31

Item 6. 

Exhibits

31

SIGNATURES 

 

 

 

 

 

 

 

i


 

 

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,” “forecast,” “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


 

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, 2018

    

December 31, 2017

 

ASSETS

 

 

(unaudited)

 

 

 

 

Property, plant and equipment

 

 

 

 

 

 

 

Electric plant

 

 

 

 

 

 

 

In service

 

$

5,869,636

 

$

5,802,844

 

Construction work in progress

 

 

191,965

 

 

175,567

 

Total electric plant

 

 

6,061,601

 

 

5,978,411

 

Less allowances for depreciation and amortization

 

 

(2,481,954)

 

 

(2,409,020)

 

Net electric plant

 

 

3,579,647

 

 

3,569,391

 

Other plant

 

 

360,981

 

 

283,546

 

Less allowances for depreciation, amortization and depletion

 

 

(110,549)

 

 

(105,660)

 

Net other plant

 

 

250,432

 

 

177,886

 

Total property, plant and equipment

 

 

3,830,079

 

 

3,747,277

 

Other assets and investments

 

 

 

 

 

 

 

Investments in other associations

 

 

144,858

 

 

143,608

 

Investments in and advances to coal mines

 

 

18,963

 

 

18,274

 

Restricted cash and investments

 

 

5,925

 

 

5,979

 

Intangible assets, net of accumulated amortization

 

 

5,493

 

 

10,986

 

Other noncurrent assets

 

 

9,715

 

 

9,604

 

Total other assets and investments

 

 

184,954

 

 

188,451

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

119,619

 

 

143,694

 

Restricted cash and investments

 

 

134

 

 

1,292

 

Deposits and advances

 

 

38,001

 

 

27,881

 

Accounts receivable—Members

 

 

105,802

 

 

102,035

 

Other accounts receivable

 

 

31,473

 

 

16,034

 

Coal inventory

 

 

74,842

 

 

46,849

 

Materials and supplies

 

 

92,064

 

 

89,459

 

Total current assets

 

 

461,935

 

 

427,244

 

Deferred charges

 

 

 

 

 

 

 

Regulatory assets

 

 

438,207

 

 

454,523

 

Prepayment—NRECA Retirement Security Plan

 

 

33,280

 

 

37,607

 

Other

 

 

48,200

 

 

38,492

 

Total deferred charges

 

 

519,687

 

 

530,622

 

Total assets

 

$

4,996,655

 

$

4,893,594

 

EQUITY AND LIABILITIES

 

 

 

 

 

 

 

Capitalization

 

 

 

 

 

 

 

Patronage capital equity

 

$

1,061,890

 

$

1,003,020

 

Accumulated other comprehensive income (loss)

 

 

(428)

 

 

(210)

 

Noncontrolling interest

 

 

109,336

 

 

111,295

 

Total equity

 

 

1,170,798

 

 

1,114,105

 

Long-term debt

 

 

3,086,601

 

 

3,120,286

 

Total capitalization

 

 

4,257,399

 

 

4,234,391

 

Current liabilities

 

 

 

 

 

 

 

Member advances

 

 

11,290

 

 

8,447

 

Accounts payable

 

 

102,540

 

 

117,510

 

Short-term borrowings

 

 

206,197

 

 

144,667

 

Accrued expenses

 

 

28,235

 

 

32,484

 

Current asset retirement obligations

 

 

1,144

 

 

3,087

 

Accrued interest

 

 

50,549

 

 

32,852

 

Accrued property taxes

 

 

27,820

 

 

27,137

 

Current maturities of long-term debt

 

 

97,601

 

 

78,004

 

Total current liabilities

 

 

525,376

 

 

444,188

 

Deferred credits and other liabilities

 

 

 

 

 

 

 

Regulatory liabilities

 

 

89,872

 

 

81,824

 

Deferred income tax liability

 

 

15,227

 

 

17,205

 

Asset retirement obligations

 

 

47,901

 

 

53,768

 

Other

 

 

51,700

 

 

53,396

 

Total deferred credits and other liabilities

 

 

204,700

 

 

206,193

 

Accumulated postretirement benefit and postemployment obligations

 

 

9,180

 

 

8,822

 

Total equity and liabilities

 

$

4,996,655

 

$

4,893,594

 

 

The accompanying notes are an integral part of these consolidated financial statements.

1


 

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, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Member electric sales

 

$

353,487

 

$

346,802

 

$

942,916

 

$

921,476

 

Non-member electric sales

 

 

31,004

 

 

25,354

 

 

62,925

 

 

85,825

 

Other

 

 

13,666

 

 

24,355

 

 

38,337

 

 

66,540

 

 

 

 

398,157

 

 

396,511

 

 

1,044,178

 

 

1,073,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased power

 

 

106,166

 

 

100,547

 

 

271,187

 

 

259,322

 

Fuel

 

 

67,840

 

 

68,337

 

 

168,081

 

 

187,658

 

Production

 

 

52,558

 

 

46,756

 

 

165,750

 

 

157,405

 

Transmission

 

 

40,291

 

 

38,752

 

 

122,255

 

 

113,038

 

General and administrative

 

 

6,398

 

 

7,326

 

 

22,923

 

 

19,347

 

Depreciation, amortization and depletion

 

 

38,977

 

 

43,332

 

 

118,620

 

 

131,094

 

Coal mining

 

 

637

 

 

12,330

 

 

637

 

 

30,090

 

Other

 

 

3,897

 

 

4,185

 

 

11,317

 

 

12,953

 

 

 

 

316,764

 

 

321,565

 

 

880,770

 

 

910,907

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating margins

 

 

81,393

 

 

74,946

 

 

163,408

 

 

162,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

1,323

 

 

1,177

 

 

3,762

 

 

3,397

 

Capital credits from cooperatives

 

 

1,272

 

 

1,323

 

 

5,472

 

 

5,720

 

Membership withdrawal

 

 

 —

 

 

 —

 

 

 —

 

 

5,000

 

Other, net

 

 

1,466

 

 

1,118

 

 

3,609

 

 

2,547

 

 

 

 

4,061

 

 

3,618

 

 

12,843

 

 

16,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of amounts capitalized

 

 

38,377

 

 

37,289

 

 

115,380

 

 

109,937

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

(151)

 

 

(259)

 

 

(453)

 

 

(863)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net margins including noncontrolling interest

 

 

47,228

 

 

41,534

 

 

61,324

 

 

70,524

 

Net income attributable to noncontrolling interest

 

 

(830)

 

 

(736)

 

 

(2,454)

 

 

(1,409)

 

Net margins attributable to the Association

 

$

46,398

 

$

40,798

 

$

58,870

 

$

69,115

 

 

The accompanying notes are an integral part of these consolidated financial statements.

2


 

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, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Net margins including noncontrolling interest

 

$

47,228

 

$

41,534

 

$

61,324

 

$

70,524

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on securities available for sale

 

 

 —

 

 

48

 

 

 —

 

 

94

 

Reclassification of unrealized gain on securities available for sale included in net income

 

 

 —

 

 

 —

 

 

(159)

 

 

 —

 

Amortization of actuarial gain on postretirement benefit obligation included in net income

 

 

(20)

 

 

(20)

 

 

(59)

 

 

(59)

 

Income tax expense related to components of other comprehensive income (loss)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other comprehensive income (loss)

 

 

(20)

 

 

28

 

 

(218)

 

 

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income including noncontrolling interest

 

 

47,208

 

 

41,562

 

 

61,106

 

 

70,559

 

Net comprehensive income attributable to noncontrolling interest

 

 

(830)

 

 

(736)

 

 

(2,454)

 

 

(1,409)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to the Association

 

$

46,378

 

$

40,826

 

$

58,652

 

$

69,150

 

 

The accompanying notes are an integral part of these consolidated financial statements.

3


 

Tri-State Generation and Transmission Association, Inc.

Consolidated Statements of Equity (unaudited)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

Nine Months Ended September 30, 

 

 

    

2018

    

2017

    

    

2018

    

2017

    

Patronage capital equity at beginning of period

 

$

1,015,492

 

$

989,681

 

 

$

1,003,020

 

$

961,364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net margins attributable to the Association

 

 

46,398

 

 

40,798

 

 

 

58,870

 

 

69,115

 

Patronage capital equity at end of period

 

 

1,061,890

 

 

1,030,479

 

 

 

1,061,890

 

 

1,030,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss) at beginning of period

 

 

(408)

 

 

(279)

 

 

 

(210)

 

 

(286)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on securities available for sale

 

 

 —

 

 

48

 

 

 

 —

 

 

94

 

Reclassification adjustment for unrealized gain on securities available for sale included in net income

 

 

 —

 

 

 —

 

 

 

(159)

 

 

 —

 

Reclassification adjustment for actuarial gain on postretirement benefit obligation included in net income

 

 

(20)

 

 

(20)

 

 

 

(59)

 

 

(59)

 

Accumulated other comprehensive income (loss) at end of period

 

 

(428)

 

 

(251)

 

 

 

(428)

 

 

(251)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest at beginning of period

 

 

110,061

 

 

109,820

 

 

 

111,295

 

 

109,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net comprehensive income attributable to noncontrolling interest

 

 

830

 

 

736

 

 

 

2,454

 

 

1,409

 

Equity distribution to noncontrolling interest

 

 

(1,555)

 

 

 —

 

 

 

(4,413)

 

 

 —

 

Noncontrolling interest at end of period

 

 

109,336

 

 

110,556

 

 

 

109,336

 

 

110,556

 

Total equity at end of period

 

$

1,170,798

 

$

1,140,784

 

 

$

1,170,798

 

$

1,140,784

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


 

 

Tri-State Generation and Transmission Association, Inc.

Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

  

2018

  

2017

    

Operating activities

 

 

 

 

 

 

 

Net margins including noncontrolling interest

 

$

61,324

 

$

70,524

 

Adjustments to reconcile net margins to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation, amortization and depletion

 

 

118,620

 

 

131,094

 

Amortization of intangible asset

 

 

5,493

 

 

5,493

 

Amortization of NRECA Retirement Security Plan prepayment

 

 

4,029

 

 

4,029

 

Amortization of debt issuance costs

 

 

2,210

 

 

1,479

 

Impairment loss - Holcomb expansion

 

 

 —

 

 

93,494

 

Deferred Holcomb expansion impairment loss

 

 

 —

 

 

(93,494)

 

Recognition of deferred membership withdrawal income

 

 

 —

 

 

(5,000)

 

Recognition of deferred revenue

 

 

 —

 

 

(15,000)

 

Capital credit allocations from cooperatives and income from coal mines over refund distributions

 

 

(1,493)

 

 

(1,892)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(18,721)

 

 

(5,754)

 

Coal inventory

 

 

(27,040)

 

 

15,689

 

Materials and supplies

 

 

(1,854)

 

 

(177)

 

Accounts payable and accrued expenses

 

 

(8,734)

 

 

(7,973)

 

Accrued interest

 

 

17,696

 

 

16,494

 

Accrued property taxes

 

 

684

 

 

(2,467)

 

Other deferred credits - TEP transmission settlement

 

 

 —

 

 

(15,521)

 

Other

 

 

(13,791)

 

 

(9,258)

 

Net cash provided by operating activities

 

 

138,423

 

 

181,760

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchases of plant

 

 

(199,261)

 

 

(159,656)

 

Changes in deferred charges

 

 

(1,547)

 

 

(239)

 

Proceeds from other investments

 

 

64

 

 

61

 

Net cash used in investing activities

 

 

(200,744)

 

 

(159,834)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Changes in Member advances

 

 

257

 

 

(4,590)

 

Payments of long-term debt

 

 

(73,943)

 

 

(103,138)

 

Proceeds from issuance of debt

 

 

60,000

 

 

 —

 

Increase in short-term borrowings, net

 

 

61,530

 

 

55,181

 

Retirement of patronage capital

 

 

(4,852)

 

 

(3,023)

 

Equity distribution to noncontrolling interest

 

 

(4,413)

 

 

 —

 

Other

 

 

(1,545)

 

 

(163)

 

Net cash provided by (used in) financing activities

 

 

37,034

 

 

(55,733)

 

 

 

 

 

 

 

 

 

Net decrease in cash, cash equivalents and restricted cash and investments

 

 

(25,287)

 

 

(33,807)

 

Cash, cash equivalents and restricted cash and investments – beginning

 

 

150,965

 

 

167,890

 

Cash, cash equivalents and restricted cash and investments – ending

 

$

125,678

 

$

134,083

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

102,916

 

$

101,965

 

Cash paid for income taxes

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

Change in plant expenditures included in accounts payable

 

$

67

 

$

(3,287)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

5


 

Tri-State Generation and Transmission Association, Inc.

Notes to Unaudited Consolidated Financial Statements

 

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, 2017 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. Our consolidated financial position as of September 30, 2018, results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017 are not necessarily indicative of the results that may be expected for an entire year or any other period.

 

Basis of Consolidation

 

Our consolidated financial statements include the accounts of Tri-State Generation and Transmission Association, Inc. (“Tri-State”, “we”, “our”, “us” or “the Association”), our wholly-owned and majority-owned subsidiaries, and certain variable interest entities for which we or our subsidiaries are the primary beneficiaries. See Note 16 – 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 two 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) and the Missouri Basin Power Project (“MBPP”) (operated by Basin Electric Power Cooperative (“Basin”)). Our ownership in the San Juan Project terminated December 31, 2017. 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 operating expenses 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.

 

Effective as of July 1, 2018, our ownership share in MBPP increased to 27.13 percent due to our acquisition of Heartland Consumers Power District’s 3.0 percent ownership share in MBPP.

 

Our share in each jointly owned facility is as follows as of September 30, 2018 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

                  

  

Electric

  

 

 

  

Construction

 

 

Tri-State

 

Plant in

 

Accumulated

 

Work In

 

 

Share

 

Service

 

Depreciation

 

Progress

Yampa Project - Craig Generating Station Units 1 and 2

 

24.00

%  

$

391,924

 

$

237,934

 

$

4,360

MBPP - Laramie River Station

 

27.13

%

 

420,762

 

 

297,335

 

 

49,863

Total

 

 

 

$

812,686

 

$

535,269

 

$

54,223

 

Reclassifications

 

Certain reclassifications have been made to our prior year financial statements to conform to the 2018 presentation.

 

6


 

Accounting Pronouncements-Not Yet Adopted

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“Topic 842”). Topic 842 supersedes the lease recognition requirements in Accounting Standards Codification (“ASC”) 840, Leases. Under Topic 842, a lessee is required to recognize lease assets (right-of-use assets) and lease liabilities on the balance sheet for most leases and provide enhanced qualitative and quantitative disclosures. The right-of-use asset represents a lessee’s right to use (control the use of) the underlying asset for the lease term. The lease liability represents a lessee’s obligation 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 Topic 840. For operating leases, the lessee subsequently recognizes straight-line lease expense over the life of the lease, similar to accounting for operating leases under Topic 840. Lessor accounting remains substantially the same as that applied under Topic 840. Topic 842 includes an accounting policy election by class of underlying asset to exclude short-term leases. A short-term lease is defined as a lease that, at commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This amendment is required to be applied using a modified retrospective transition method with the option to elect a package of practical expedients which includes not being required to reassess expired or existing contracts that were assessed under Topic 840, the lease classification for any expired or existing leases that were assessed under Topic 840, and accounting for the initial direct costs for any existing leases. We are currently evaluating the impact of Topic 842 on our consolidated financial statements. We have established a lease project working group and have selected a lease software solution. We are identifying and reviewing our leases and performing a completeness assessment of the lease population. We will adopt ASU 2016-02 beginning in the first quarter of 2019, including our election to adopt the package of practical expedients. We anticipate that the adoption of the amendment may have a significant impact on our consolidated statements of financial position as applicable leases will be recognized as right-of-use assets and lease obligations.

 

In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842)-Land Easement Practical Expedient for Transition to Topic 842. This amendment permits an entity to elect an optional transition practical expedient to not evaluate, under Topic 842, land easements that exist or that expired before the entity’s adoption of Topic 842. Once an entity adopts Topic 842, the new guidance should be applied prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease. We will adopt this optional transition practical expedient upon adoption of ASU 2016-02.

 

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements.  This amendment provides entities with an additional (and optional) transition method to adopt Topic 842. Under this new transition method, an entity recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. An entity’s reporting for the comparative periods presented in the financial statements in which it adopts Topic 842 will continue to be in accordance with current GAAP (Topic 840, Leases). This amendment also provides lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component if certain conditions are met. Both the optional transition method and lessor practical expedient are effective upon the same adoption date of Topic 842. We will adopt the optional transition method upon adoption of ASU 2016-02. We are currently evaluating the impact of the lessor practical expedient on our consolidated financial statements.

 

 

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”) based on 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 as expenses and regulatory liabilities as operating revenue, other income, or a reduction in expense concurrent with their recovery in rates.

7


 

 

Regulatory assets and liabilities are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2018

    

2017

 

Regulatory assets

 

 

 

 

 

 

 

Deferred income tax expense (1)

 

$

15,227

 

$

17,205

 

Deferred prepaid lease expense – Craig Unit 3 Lease (2)

 

 

 —

 

 

3,237

 

Deferred prepaid lease expense – Springerville Unit 3 Lease (3)

 

 

86,578

 

 

88,296

 

Goodwill – J.M. Shafer (4)

 

 

52,706

 

 

54,843

 

Goodwill – Colowyo Coal (5)

 

 

38,486

 

 

39,261

 

Deferred debt prepayment transaction costs (6)

 

 

151,716

 

 

158,187

 

Deferred Holcomb expansion impairment loss (7)

 

 

93,494

 

 

93,494

 

Total regulatory assets

 

 

438,207

 

 

454,523

 

 

 

 

 

 

 

 

 

Regulatory liabilities

 

 

 

 

 

 

 

Interest rate swap - unrealized gain (8)

 

 

12,641

 

 

4,311

 

Interest rate swap - realized gain (9)

 

 

4,332

 

 

4,614

 

Deferred revenues (10)

 

 

30,327

 

 

30,327

 

Membership withdrawal (11)

 

 

42,572

 

 

42,572

 

Total regulatory liabilities

 

 

89,872

 

 

81,824

 

Net regulatory asset

 

$

348,335

 

$

372,699

 

 

(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)

Represented deferral of the loss on acquisition related to the Craig Generating Station Unit 3 prepaid lease expense upon acquisitions of equity interests in 2002 and 2006. The regulatory asset for the deferred prepaid lease expense was amortized to depreciation, amortization and depletion expense in the amount of $6.5 million annually through December 31, 2017. The remaining $3.2 million was amortized to depreciation, amortization and depletion expense for the six month period ending June 30, 2018 and recovered from our Members in rates.

(3)

Represents deferral of the 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 2009. The regulatory asset for the deferred prepaid lease expense is being amortized to depreciation, 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 in December 2011. 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 2011. 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 2014. These costs are being amortized to depreciation, amortization and depletion expense in the amount of $8.6 million annually over the 21-year period ending in 2035 and recovered from our Members in rates.

(7)

Represents deferral of the impairment loss related to development costs, including costs for the option to purchase development rights for the expansion of the Holcomb Generating Station. The plan for the recovery from our Members in rates has not been determined by our Board. Once the plan for recovery is determined, the deferred impairment loss will be recognized in other operating expenses.

(8)

Represents deferral of an unrealized gain related to the change in fair value of a forward starting interest rate swap that was entered into in 2016 in order to hedge interest rates on anticipated future borrowings. Upon settlement of this interest rate swap, the realized gain or loss will be deferred and subsequently recognized as interest expense when amortized over the term of the associated long-term debt borrowing. See Note 8 – Long-Term Debt.

8


 

(9)

Represents deferral of a realized gain of $4.6 million related to the October 2017 settlement of a forward starting interest rate swap that was entered into in 2016. This realized gain was deferred as a regulatory liability and is being amortized to interest expense over the 12-year term of the First Mortgage Obligations, Series 2017A.

(10)

Represents deferral of the recognition of non-member electric sales revenues. 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.

(11)

Represents the deferral of the recognition of other income recorded in connection with the withdrawal of a former Member from membership in us. 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 and other required investments in the organizations. 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.

 

Investments in other associations are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

 

    

2018

    

2017

 

Basin Electric Power Cooperative

 

$

101,820

 

$

101,820

 

National Rural Utilities Cooperative Finance Corporation - patronage capital

 

 

11,704

 

 

11,232

 

National Rural Utilities Cooperative Finance Corporation - capital term certificates

 

 

16,021

 

 

16,085

 

CoBank, ACB

 

 

8,671

 

 

8,174

 

Western Fuels Association, Inc.

 

 

2,400

 

 

2,346

 

Other

 

 

4,242

 

 

3,951

 

Investments in other associations

 

$

144,858

 

$

143,608

 

 

Our investments in other associations are considered equity securities without readily determinable fair values, and as such are measured at cost minus impairment. We have evaluated these investments for indicators of impairment. There were no impairments of these investments recognized during the nine months ended September 30, 2018 or 2017.

 

NOTE 4 – INVESTMENTS IN AND ADVANCES TO COAL MINES  

 

We have direct ownership and investments in coal mines to support our coal generating resources. We, and certain participants in the Yampa Project, are members of Trapper Mining, which is organized as a cooperative and is the owner and operator of the Trapper Mine near Craig, Colorado. Our investment in Trapper Mining is recorded using the equity method. In addition, we have ownership in Western Fuels Association, Inc. (“WFA”), which is an owner of Western Fuels‑Wyoming, Inc. (“WFW”), the owner and operator of the Dry Fork Mine near Gillette, Wyoming. Dry Fork Mine provides coal to MBPP, which is the owner of Laramie River Generating Station. We, through our undivided interest in the jointly owned facility MBPP, advance funds to the Dry Fork Mine.

 

Investments in and advances to coal mines are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

 

    

2018

    

2017

 

Investment in Trapper Mine

 

$

15,217

 

$

14,998

 

Advances to Dry Fork Mine

 

 

3,746

 

 

3,276

 

Investments in and advances to coal mines

 

$

18,963

 

$

18,274

 

 

 

9


 

NOTE 5 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH AND INVESTMENTS    

 

We consider highly liquid investments with an original maturity of three months or less to be cash equivalents. The fair value of cash equivalents approximates their carrying values due to their short-term maturity.

 

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 are funds that have been 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.

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash and investments reported within our consolidated statements of financial position that sum to the total of the same such amount shown in our consolidated statements of cash flows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

  

September 30, 

 

December 31,

 

 

    

2018

    

2017

 

Cash and cash equivalents

 

$

119,619