10-K 1 tris-20181231x10k.htm 10-K tris_Current folio_10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


 

FORM 10-K

 

(Mark One)

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

 

For the fiscal year ended December 31, 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
number)

 

 

1100 West 116th Avenue

 

Westminster, Colorado

80234

(Address of principal executive offices)

(Zip Code)

 

(303) 452-6111

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:  NONE

Securities registered pursuant to Section 12(g) of the Act:  NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.   Yes   No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes   No

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

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 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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant:  NONE.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock.  The registrant is a membership corporation and has no authorized or outstanding equity securities.

Documents incorporated by reference:  NONE.

 

 


 

 

TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, INC.

Index to 2018 Annual Report on Form 10-K

 

 

 

Item Number

 

Page

Part I

 

1. 

Business

1

1A. 

Risk Factors

24

1B. 

Unresolved Staff Comments

32

2. 

Properties

33

3. 

Legal Proceedings

35

4. 

Mine Safety Disclosures

37

Part II

 

5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

38

6. 

Selected Financial Data

38

7. 

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

39

7A. 

Quantitative and Qualitative Disclosures About Market Risk

51

8. 

Financial Statements and Supplementary Data

53

9. 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

85

9A. 

Controls and Procedures

85

9B. 

Other Information

86

Part III

 

10. 

Directors, Executive Officers and Corporate Governance

87

11. 

Executive Compensation

94

12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

101

13. 

Certain Relationships and Related Transactions, and Director Independence

101

14. 

Principal Accounting Fees and Services

102

Part IV

 

15. 

Exhibits, Financial Statement Schedules

103

16. 

Form 10-K Summary

107

Signatures 

108

 

 

 

Appendix A 

Calculation of Financial Ratios

A-1

 

 

i


 

 

GLOSSARY

The following abbreviations and acronyms used in this annual report on Form 10-K are defined below:

 

 

 

 

Abbreviations or Acronyms

 

Definition

BART

 

best available retrofit technology

Basin

 

Basin Electric Power Cooperative

Board

 

Board of Directors

CDPHE

 

Colorado Department of Public Health and Environment

CERCLA, or Superfund

 

Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended

CFC

 

National Rural Utilities Cooperative Finance Corporation

Clean Water Act

 

Federal Water Pollution Control Act, as amended

CO2

 

carbon dioxide

CoBank

 

CoBank, ACB

Colowyo Coal

 

Colowyo Coal Company L.P., a subsidiary of ours

COPUC

 

Colorado Public Utilities Commission

Corps

 

U.S. Army Corps of Engineers

Craig Station

 

Craig Generating Station

D.C. Circuit Court of Appeals

 

United States Court of Appeals for the District of Columbia Circuit

DMEA

 

Delta-Montrose Electric Association

DM/NFR

 

Denver Metropolitan/North Front Range

DSR

 

Debt Service Ratio (as defined in our Master Indenture)

ECR

 

Equity to Capitalization Ratio (as defined in our Master Indenture)

EMS

 

Environmental Management System

EPA

 

Environmental Protection Agency

Elk Ridge

 

Elk Ridge Mining and Reclamation, LLC, a subsidiary of ours

Escalante Station

 

Escalante Generating Station

FERC

 

Federal Energy Regulatory Commission

Fitch

 

Fitch Ratings Inc.

FPA

 

Federal Power Act, as amended

GAAP

 

accounting principles generally accepted in the United States

IRS

 

Internal Revenue Service

KCEC

 

Kit Carson Electric Cooperative, Inc.

kWh

 

kilowatt hour

LIBOR

 

London Interbank Offered Rate

MACT

 

maximum achievable control technology

Master Indenture

 

Master First Mortgage Indenture, Deed of Trust and Security Agreement, dated effective as of December 15, 1999, between us and Wells Fargo Bank, National Association, as trustee

MBPP

 

Missouri Basin Power Project

Members

 

our member distribution systems

Moody’s

 

Moody’s Investors Services, Inc.

MRO

 

Midwestern Reliability Organization

MRRE

 

Multi-Regional Registered Entity

MW

 

Megawatt

MWh

 

megawatt hour

MWTG

 

Mountain West Transmission Group

NAAQS

 

National Ambient Air Quality Standard

NERC

 

North American Electric Reliability Corporation

NMPRC

 

New Mexico Public Regulation Commission

NOX

 

nitrogen oxide

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NPDES

 

National Pollutant Discharge Elimination System

NPPD

 

Nebraska Public Power District

NRECA

 

National Rural Electric Cooperative Association

NSPS

 

New Source Performance Standard

OATT

 

Open Access Transmission Tariff

OSMRE

 

Office of Surface Mining Reclamation and Enforcement

PCB

 

polychlorinated biphenyls

PNM

 

Public Service Company of New Mexico

ppb

 

parts per billion

PSCO

 

Public Service Company of Colorado

PURPA

 

Public Utility Regulatory Policies Act of 1978, as amended

RCRA

 

Resource Conservation and Recovery Act, as amended

Revolving Credit Agreement

 

Credit Agreement, dated as of April 25, 2018, between us and CFC, as administrative agent

RPS

 

Renewable Portfolio Standard

RS Plan

 

National Rural Electric Cooperative Association Retirement Security Plan

RUS

 

United States Department of Agriculture, Rural Utilities Service

Salt River Project

 

Salt River Project Agricultural Improvement and Power District

S&P

 

Standard & Poor’s Global Ratings

SEC

 

Securities and Exchange Commission

SIP

 

State Implementation Plan

SO2

 

sulfur dioxide

SPP

 

Southwest Power Pool, Inc.

Springerville Partnership

 

Springerville Unit 3 Partnership LP, a subsidiary of ours

Springerville Unit 3

 

Springerville Generating Station Unit 3

Sunflower

 

Sunflower Electric Power Corporation

TCP

 

Thermo Cogeneration Partnership, L.P., a subsidiary of ours

TEP

 

Tucson Electric Power Company

Trapper Mining

 

Trapper Mining, Inc.

Tri-State, We, Our, Us, the Association

 

Tri-State Generation and Transmission Association, Inc.

WAPA

 

Western Area Power Administration (a power marketing agency of the U.S. Department of Energy)

WECC

 

Western Electricity Coordinating Council

WFA

 

Western Fuels Association, Inc.

WFW

 

Western Fuels-Wyoming, Inc.

WIIN

 

Water Infrastructure Improvements for the Nation

WOTUS

 

Waters of the United States

Yampa Project

 

Craig Station Units 1 and 2 and related common facilities

 

 

iii


 

 

FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K 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,” “is expected to,” “will continue,” “is anticipated,” “estimated,” “forecasted,” “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.

 

 

 

iv


 

PART I

ITEM 1.BUSINESS

OVERVIEW

Our Business

 

Tri-State Generation and Transmission Association, Inc. is a taxable wholesale electric power generation and transmission cooperative operating on a not‑for‑profit basis serving large portions of Colorado, Nebraska, New Mexico and Wyoming. We were incorporated under the laws of the State of Colorado in 1952 as a cooperative corporation. We supply wholesale electric power to our forty-three Members, which, in turn, supply retail electric power to residential, commercial, industrial and agricultural customers.

 

We are owned entirely by our Members. Thirty-nine of our Members are not‑for‑profit, electric distribution cooperative associations. The remaining four Members are public power districts, which are political subdivisions of the State of Nebraska. The retail service territories of our Members cover approximately 200,000 square miles and their customers include suburban and rural residences, farms and ranches, and large and small businesses and industries. Our Members serve approximately 615,000 retail electric meters. Our Members are the sole state certified providers of electric service to retail (residential and business) customers within their designated service territories.

 

Our principal executive offices are located at 1100 West 116th Avenue, Westminster, Colorado 80234. Our telephone number is (303) 452‑6111. Our website is www.tristate.coop. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are made available on our website as soon as reasonably practicable after the material is filed with the SEC. Information contained on our website is not incorporated by reference into and should not be considered to be part of this annual report.

 

Including our subsidiaries, as of December 31, 2018, we employed 1,504 people, of which 304 were subject to collective bargaining agreements. As of December 31, 2018, none of these collective bargaining agreements will expire within one year.

 

Cooperative Structure

 

A cooperative is a business entity owned by its members, which are also its retail or wholesale customers. Cooperatives are designed to give their members the opportunity to satisfy their collective needs in a particular area of business more effectively than if the members acted independently. As organizations acting on a not‑for‑profit basis, cooperatives provide services to their members on a cost effective basis, in part by eliminating the need to produce profits or a return on equity in excess of required margins. Cooperatives generally establish rates to recover their cost‑of‑service and to collect a portion of revenues in excess of expenses, which constitute margins. Margins not yet distributed to members in cash constitute patronage capital, a cooperative’s principal source of equity. Patronage capital is held for the account of the members without interest and returned when the board of directors deems it appropriate to do so. The timing and amount of any actual return of capital to the members depends on the financial goals of the cooperative, current and projected capital expenditures, and the cooperative’s loan and security agreements.

 

Electric cooperatives generally include distribution cooperatives, such as thirty-nine of our Members, and generation and transmission cooperatives, such as us. The primary purpose of electric distribution cooperatives is to supply the requirements of their retail consumers through bulk purchases of capacity and energy and to maintain a distribution system to deliver the electricity necessary to satisfy their consumers’ requirements. The primary purpose of generation and transmission cooperatives is to provide wholesale electric power to their member distribution cooperatives.

 

Power Supply and Transmission

 

We supply and transmit our Members’ electric power requirements through a portfolio of resources, including generation and transmission facilities, long‑term purchase contracts and short‑term energy purchases. We own, lease,

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have undivided percentage interests in, have tolling arrangements or long-term purchase contracts with respect to, various generating facilities. Our diverse generation portfolio provides us with maximum available power of 4,519 MWs and is summarized in the table below:

 

 

 

 

Generation Portfolio:

Capacity

Percentage

 

(MW)

(%)

Coal-fired base load facilities

1,884

42

Renewables-contracts, including WAPA

1,059

23

Gas/oil-fired facilities

973

22

Other contracts, including Basin

603

13

 

In December 2018, we executed a 100 MW solar-based power purchase agreement for the Spanish Peaks Solar Project that is expected to achieve commercial operation in 2023. In February 2019, we executed a 104 MW wind-based power purchase agreement for the Crossing Trails Wind Farm that is expected to achieve commercial operation in 2020. Upon commercial operation of these two new renewable generating facilities, our renewable generation portfolio is expected to increase to 1,263 MWs. See “— POWER SUPPLY RESOURCES – Purchased Power” and “PROPERTIES” for a description of our long-term purchase contracts and our generating facilities.

 

In addition to our diverse generation portfolio, as permitted by our wholesale electric service contracts with our Members, as of December 31, 2018, our Members own or control through long-term purchase power contracts approximately 111 MWs of distributed or renewable capacity that is used to deliver energy to our Members’ customers.

 

We transmit power to our Members through resources that we own, lease or have undivided percentage interests in, or by wheeling power across lines owned by other transmission providers. We have ownership or capacity interests in approximately 5,665 miles of high‑voltage transmission lines and own or have major equipment ownership in approximately 409 substations and switchyards. See “PROPERTIES” for a description of our transmission facilities.

2


 

MEMBERS

General

 

Our Members provide electric services, consisting of power supply and distribution services, to residential, commercial, industrial and agricultural customers primarily in Colorado, Nebraska, New Mexico and Wyoming. Our Members’ businesses involve the operation of substations, transformers and electric lines that deliver power to their customers. We currently have 43 Members. Our Members and their locations are as follows:

 

 

 

 

Colorado:

 

 

Delta-Montrose Electric Association

 

Poudre Valley Rural Electric Association, Inc.

Empire Electric Association, Inc.

 

San Isabel Electric Association, Inc.

Gunnison County Electric Association, Inc.

 

San Luis Valley Rural Electric Cooperative, Inc.

Highline Electric Association

 

San Miguel Power Association, Inc.

K.C. Electric Association, Inc.

 

Sangre de Cristo Electric Association, Inc.

La Plata Electric Association, Inc.

 

Southeast Colorado Power Association

Morgan County Rural Electric Association

 

United Power, Inc.

Mountain Parks Electric, Inc.

 

White River Electric Association, Inc.

Mountain View Electric Association, Inc.

 

Y-W Electric Association, Inc.

 

 

 

 

Nebraska:

 

 

Chimney Rock Public Power District

 

Panhandle Rural Electric Membership Association

The Midwest Electric Cooperative Corporation

 

Roosevelt Public Power District

Northwest Rural Public Power District

 

Wheat Belt Public Power District

 

 

 

 

New Mexico:

 

 

Central New Mexico Electric Cooperative, Inc.

 

Otero County Electric Cooperative, Inc.

Columbus Electric Cooperative, Inc.

 

Sierra Electric Cooperative, Inc.

Continental Divide Electric Cooperative, Inc.

 

Socorro Electric Cooperative, Inc.

Jemez Mountains Electric Cooperative, Inc.

 

Southwestern Electric Cooperative, Inc.

Mora-San Miguel Electric Cooperative, Inc.

 

Springer Electric Cooperative, Inc.

Northern Rio Arriba Electric Cooperative, Inc.

 

 

 

 

 

 

Wyoming:

 

 

Big Horn Rural Electric Company

 

High West Energy, Inc.

Carbon Power & Light, Inc.

 

Niobrara Electric Association, Inc.

Garland Light & Power Company

 

Wheatland Rural Electric Association

High Plains Power, Inc.

 

Wyrulec Company

 

Bylaws

 

Our Bylaws require each Member, unless otherwise specified in a written agreement, to purchase all electric power and energy used by the Member from us. This requirement in our Bylaws is further specified in the wholesale electric service contract with each Member, which is an all-requirements contract. Each wholesale electric service contract obligates us to sell and deliver to the Member, and obligates the Member to purchase and receive, at least 95 percent of its electric power requirements from us. Our Bylaws also provide that provisions may be made in our Bylaws for additional classes of membership.  Currently, we only have one class of membership known as the Class A membership and all Members are Class A members.  Our Board has proposed amendments to our Bylaws to allow for the possibility of creating additional classes of membership in us.  The proposed amendments would permit our Board to establish such additional classes of membership and the rights and privileges of the members of those additional classes. At a special meeting of our Members held in March 2019, our Members discussed the proposed amendments to the Bylaws and support such amendments. We expect for our Members to vote on the amendments to the Bylaws at our annual meeting in April 2019. If the Members adopt the amendments to the Bylaws, our Board will have the flexibility to address any changes to the structure of our wholesale electric service contracts, including the possibility to add new members without such new members becoming an all-requirements member.

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Pursuant to our Bylaws, a Member may only withdraw from membership in us upon compliance with such equitable terms and conditions as our Board may prescribe provided, however, that no Member shall be permitted to withdraw until it has met all its contractual obligations to us, including all obligations under its wholesale electric service contract with us.  From time to time, a Member may request equitable terms and conditions as our Board may prescribe for withdrawal or we may provide for informational purposes to all or a portion of our Members equitable terms and conditions for withdrawal. In addition, from time to time, we may be in discussions with a Member regarding the equitable terms and conditions for withdrawal and their request for withdrawal, including granting a Member permission to explore options for potential alternative supplies of power. However, any such permission is not considered authorization to withdraw and does not change the Member’s requirements and obligation to comply with such equitable terms and conditions as our Board may prescribe. DMEA, which constituted approximately 3.2 percent of our revenue from Member sales in 2018, has requested an exit cost calculation from us and we have provided to DMEA a preliminary buyout number. DMEA disputes the buyout number provided to DMEA by us and filed a formal complaint with the COPUC in December 2018 alleging that the COPUC has jurisdiction over the equitable terms and conditions as our Board may prescribe for withdrawal. We filed a motion to dismiss the complaint because the COPUC does not have jurisdiction over the complaint. At its open meeting on February 14, 2019, the COPUC stated it had jurisdiction over the complaint and denied our motion to dismiss. The COPUC has set a 5-day evidentiary hearing beginning on June 17, 2019. See “LEGAL PROCEEDINGS.”

 

Wholesale Electric Service Contracts

 

Our revenues are derived primarily from the sale of electric power to our Members pursuant to long‑term wholesale electric service contracts. We have entered into substantially similar contracts with each Member extending through 2050 for 42 Members (which constituted approximately 96.8 percent of our revenue from Member sales in 2018) and extending through 2040 for the remaining Member (DMEA). These contracts are subject to automatic extension thereafter until either party provides at least two years’ notice of its intent to terminate. Each contract obligates us to sell and deliver to the Member, and obligates the Member to purchase and receive from us, at least 95 percent of the power it requires for the operation of its system, except for sources, such as photovoltaic cells, fuel cells, or others that are not connected to such Member’s distribution or transmission system. Each Member may elect to provide up to 5 percent of its requirements from distributed or renewable generation owned or controlled by the Member. As of December 31, 2018, 21 Members have enrolled in this program with capacity totaling approximately 139 MWs of which 111 MWs are in operation. In 2018, we estimate that nearly a third of the energy delivered by us and our Members to our Members’ customers came from non-carbon emitting resources.

 

Our Members’ demand for energy is influenced by seasonal weather conditions. Historically, our peak load conditions have occurred during the months of June through August, which is when irrigation loads are the highest. Our summer peak load conditions depend on summer temperatures and the amount of precipitation during the growing season (generally May through September). Relatively higher summer or lower winter temperatures tend to increase the demand and usage of electricity for heating, air conditioning and irrigation. Mild weather generally reduces the demand and usage of electricity because heating, air conditioning and irrigation systems are operated less frequently.

 

The below table shows our Members’ aggregate coincident peak demand for the years 2014 through 2018 and the amount of energy that we supplied them. Our Members’ peak demand and our annual amount of energy sold to our Members for 2018 increased by 4.4 percent and 3.0 percent, respectively, compared to 2017.

 

 

 

 

 

 

 

 

Year

    

Members' Peak Demand (MW)

(1)

Amount of Energy Sold (MWh)

(1)

 

2018

 

2,974

 

16,384,415

 

 

2017

 

2,850

 

15,905,656

 

 

2016

 

2,802

 

15,746,382

 

 

2015

 

2,753

 

15,780,670

 

 

2014

 

2,813

 

15,426,603

 

 


(1)

Includes peak demand of and energy sales to KCEC through June 30, 2016.

 

4


 

Subject to certain force majeure conditions, we are required under the wholesale electric service contracts to use reasonable diligence to provide a constant and uninterrupted supply of electric service to our Members. If our generation and sources of supply are inadequate to serve all of our Members’ demand, and we are unable to secure additional sources of supply, we are permitted to interrupt service to our Members in accordance with a written policy established by our Board. We are currently able to provide all the requirements of our Members and intend to construct the necessary facilities or make other arrangements to continue to do so.

 

The wholesale electric service contracts we have with our Members provide that our Members shall pay us for electric service at rates and on the terms and conditions established by our Board at levels sufficient to produce revenues, together with revenues from all other sources, to meet our cost of operation, including reasonable reserves, debt and lease service, and development of our equity. See “— RATE REGULATION.”  Our Members are obligated to pay us monthly for the power, energy and transmission service we supply to them. Revenue from one Member, United Power, Inc., comprised 15.0 percent of our Member revenue and 14.0 percent of our operating revenue in 2018. No other Member exceeded 10 percent of our Member revenue or our operating revenue in 2018. Payments due to us under the wholesale electric service contracts are pledged and assigned to secure the obligations secured under our Master Indenture. A Member cannot resell at wholesale any of the electric energy delivered to it under the wholesale electric service contract, unless such resale is approved by our Board or provided for in a schedule to the wholesale electric service contract.

 

The wholesale electric service contracts we have with our Members provides for us to establish a committee every 5 years to review the wholesale electric service contract for the purposes of making recommendations to our Board concerning any suggested modifications. In 2016 and 2017, a contract committee consisting of a representative from each Member discussed changes to the wholesale electric service contracts. The contract committee in 2017 recommended to our Board no changes to the wholesale electric service contract with our Members, but did recommend that the contract committee be reconvened in 2 years. In 2019, we expect the contract committee consisting of a representative from each Member to be reconvened to review the wholesale electric service contracts and discuss changes.

 

We and our Members are subject to regulations issued by FERC pursuant to PURPA with respect to matters involving the purchase of electricity from, and the sale of electricity to, qualifying facilities and co‑generators. In June 2015, FERC clarified that the 5 percent limitation in our wholesale electric service contracts with our Members related to distributed or renewable generation owned or controlled by our Members did not supersede PURPA and the requirement of our Members to purchase power from qualifying facilities. In February 2016, we filed a Petition for Declaratory Order with FERC for a clarification that the fixed cost recovery mechanism in our revised Board policy is consistent with the provisions of PURPA and the implementing regulations of FERC. The revised Board policy provides for recovery of the unrecovered fixed costs directly from that Member, rather than allocating the costs among all of our Members. The fixed cost recovery is calculated based on the difference between our wholesale rate to our Members and our avoided costs. In June 2016, FERC denied our Petition for Declaratory Order related to the fixed cost recovery mechanism in our revised Board policy. We filed a Request for Rehearing with FERC regarding FERC’s June 2016 order. We are awaiting FERC’s decision on our request for rehearing. See “LEGAL PROCEEDINGS.”

 

In July 2016, we filed on behalf of ourselves and thirty of our Members a petition for a partial waiver for FERC’s PURPA regulations. Pursuant to such petition, we will purchase capacity and energy from qualifying facilities that interconnect to distribution systems of those Members who are participating in the waiver program. We will make such purchase at a rate equal to our full avoided cost. As part of the waiver program, those participating Members will sell supplementary, back-up, and maintenance power to the qualifying facilities. We are awaiting FERC’s decision on this petition for waiver.

 

Members’ Service Territories and Customers

 

Service Territories. Our Members’ service territories are diverse, covering large portions of Colorado, Nebraska, New Mexico and Wyoming and very small portions of Arizona, Montana, and Utah. In accordance with state regulations, our Members have exclusive rights to provide electric service to retail customers within designated service territories. In Colorado, our Members’ service territories extend throughout the state and encompass suburban, rural,

5


 

industrial, agricultural and mining areas. In Nebraska, our Members’ service territories are comprised primarily of rural residential and farm customers in the western part of the state. In New Mexico, our Members’ service territories extend throughout the northern, southern, central and western parts of the state, serving agricultural, rural residential, suburban, small commercial and mining customers. In Wyoming, our Members’ service territories extend from the north central to the southeastern part of the state and encompass rural residential, agricultural and mining areas. The differences in customer bases, economic sectors, climates and weather patterns of our Members’ service territories creates diversity within our system.

 

Customers.  According to information we received from our Members, our Members’ sales of energy in 2017 (which is the most recent information available to us) were divided by customer class as follows:

 

 

 

 

 

 

 

 

 

Percentage of

 

Percentage of

 

Customer Class

    

MWh Sales

    

Customers

 

Residential

 

29.1

%

82.8

%

Large commercial

 

38.4

 

0.1

 

Small commercial

 

21.4

 

12.7

 

Irrigation

 

8.3

 

4.0

 

Other

 

2.8

 

0.4

 

 

From 2013 to 2017, our Members experienced an average annual compound growth rate of approximately 1.2 percent in the number of customers and an average annual compound growth rate of 1.9 percent in energy sales. In 2017, which is the most recent year with data available to us, the 15 largest customers of our Members represented 18.6 percent of electric energy sales by our Members, although no single customer of our Members represented more than 4 percent of our total energy sales. These customers are primarily in the business of minerals extraction, natural gas, CO2, oil production, or transportation of these.

 

Our Members’ average number of customers per mile of energized line has been stable since 2010 at approximately five customers per mile. System densities of our Members in 2017 ranged from 1.2 customers per mile to 13.9 customers per mile.

 

Relationship with Members

 

Our Members operate their systems on a not‑for‑profit basis. We are a cooperative corporation, and our Members are not our subsidiaries. We have no legal interest in, or obligation with respect to, any of the assets, liabilities, equity, revenue or margins of our Members except with respect to the obligations of our Members under their respective wholesale electric service contracts or other agreements with us. We have no control over or the right, ability or authority to control the electric facilities, operations, or maintenance practices of our Members. Pursuant to our Bylaws, we and our Members disclaim any intent or agreement to be a partnership, joint venture, single or joint enterprise, or any other business form, except that of a cooperative corporation and member. The revenues of our Members are not pledged to us, but are received by the respective Member and are the source from which moneys are derived by such Member to pay for capacity and energy supplied by us under the respective wholesale electric service contract as well as from others. We occasionally have disputes with individual Members or small groups of Members. In December 2018, DMEA filed a complaint with the COPUC alleging the COPUC has jurisdiction over the equitable terms and conditions as our Board may prescribe for DMEA’s withdrawal from us and the preliminary buyout number provided by us was unjust, unreasonable, and discriminatory. See “LEGAL PROCEEDINGS.”

 

Eastern and Western Interconnection

 

North America is comprised of three major power grids, including the Western Interconnection and the Eastern Interconnection. The Western and Eastern Interconnection operate almost independently of each other with multiple direct current ties between the two grids. We have transmission facilities and serve our Members’ load in both the Western and Eastern Interconnection. Approximately 4.5 percent of our total load and transmission facilities are located in the Eastern Interconnection. Our generating facilities are located in the Western Interconnection and generally isolated from our Members’ load in the Eastern Interconnection. We purchase, under a long-term purchase contract with Basin,

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all the power which we require to serve our Members’ load in the Eastern Interconnection. See “— POWER SUPPLY RESOURCES — Purchased Power.”

 

Competition

 

In accordance with state regulations, our Members have exclusive rights to provide electric service to retail customers within designated service territories. States in which our Members’ service territories are located have not enacted retail competition legislation. Federal legislation could mandate retail choice in every state. Our Members are subject to customer conservation and energy efficiency activities, as well as initiatives to utilize alternative energy sources, including self-generation, or otherwise bypass our Members’ systems. Our Members are also subject to competition for attracting new loads as potential customers may locate their facilities in our Member’s designated service territory or the service territory of a neighboring utility.

 

In 1992, we entered into an agreement expiring in December 2025 with PSCO and PacifiCorp, two of the principal investor‑owned utilities adjacent to our Members’ service territories in Wyoming and Colorado that provides, among other things, that each of PSCO, PacifiCorp and us will:

 

·

not make any hostile or unfriendly attempt to acquire or take over any stock or assets of any member served by another party to the agreement;

·

respect all certificates of convenience and necessity and not attempt to serve any consumers within another’s certified area; and

·

seek to preserve territorial boundaries when threatened by municipal annexations.

RATE REGULATION

General

 

We provide electric power to our Members at rates established by our Board. Our wholesale electric service contracts with our Members provide that rates paid by our Members for the electric power we supply to them must be set at levels sufficient to produce revenues, together with revenues from all other sources, to meet our cost of operation, including reasonable reserves, debt and lease service, and development of equity. Although our rates are generally not subject to regulation by federal, state or other governmental agencies, we are required to submit the rates to the NMPRC. See “— Regulation of Rates.” We provide electric power to non‑members at contractual rates under long‑term arrangements and at market prices in short-term transactions. Our Board has adopted and periodically reviews and revises a Board Policy for Financial Goals and Capital Credits, which currently targets rates payable by our Members to produce financial results above the requirements of our Master Indenture. The policy may be changed by our Board at any time. Our Master Indenture requires us to establish rates that are reasonably expected to achieve a DSR of at least 1.10 on an annual basis and requires us to maintain an ECR of at least 18 percent at the end of each fiscal year.

 

Our electric sales revenues are derived from electric power sales to our Members and non‑member purchasers. Revenues from electric power sales to our Members are primarily from our Class A wholesale rate schedule. Our Class A rate schedule for electric power sales to our Members consist of three billing components: an energy rate and two demand rates. Member rates for energy and demand are set by our Board, consistent with the provision of reliable cost-based supply of electricity over the long term to our Members. Energy is the physical electricity delivered to our Members. In 2018 (A‑40 rate), 2017 (A‑40 rate) and 2016 (A‑39 rate), our Class A wholesale rate schedules used the same rate design. The energy rate was billed based upon a price per kWh of physical energy delivered and the two demand rates (a generation demand and a transmission/delivery demand) were both billed based on the Member’s highest thirty-minute integrated total demand measured in each monthly billing period during our peak period from noon to 10:00 pm daily, Monday through Saturday, with the exception of six holidays.

 

Approved by our Board in September 2018, the A‑40 rate schedule will continue in effect for 2019.

 

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Rate Policy

 

Pursuant to our Board Policy for Financial Goals and Capital Credits, as described above, management proposes rates that are expected to adequately recover our annual Member revenue requirements contingent upon load projections and a budget approved annually by our Board. Our Board reviews the budget and our underlying rates on an annual basis in accordance with our financial goals and rate objectives, and in accordance with the financial covenants contained in our debt instruments. The following table shows our average Member revenue/kWh for the years 2014 through 2018. The average Member revenue/kWh is our total Members’ electric sales revenue in a given year divided by the total kilowatt hours sold to our Members in that given year. The average Member revenue/kWh does not represent the actual energy and demand rate components established by our Board and paid by our Members for the years 2014 through 2018.

 

 

 

 

 

Year

    

Average Member Revenue (Cents/kWh)

    

2018

 

7.543

 

2017

 

7.544

 

2016

 

7.207

 

2015

 

7.133

 

2014

 

7.140

 

 

Under the Master Indenture, we are required to establish rates that are reasonably expected to achieve a DSR of at least 1.10 on an annual basis. The Master Indenture also requires that we review rates promptly at any point during the year upon any material change in circumstances which was not contemplated during the annual review of Member rates.

 

Regulation of Rates

 

Our rates are established by our Board. However, we are involved in a proceeding in New Mexico which could result in oversight of our prior wholesale rates by the NMPRC. This proceeding is currently suspended for global settlement discussions regarding our prior A-37 (2013) and A-38 (2014 and 2015) Class A wholesale rate schedules payable by our Members. According to New Mexico law, we are required to file our Member rates with the NMPRC and the NMPRC only has regulatory authority over our rates in New Mexico in the event three or more of our New Mexico Members file a request to review our rates and the NMPRC finds such request to be qualified. See “LEGAL PROCEEDINGS.”

 

Under the FPA, electric cooperatives are not subject to rate regulation by FERC, if they are financed by RUS; they sell less than 4 million MWhs of electricity per year; or they are wholly owned by entities that are themselves not subject to rate regulation by FERC. We are not subject to FERC rate jurisdiction since each of our Members sells fewer than 4 million MWhs per year. In 2017, which is the most recent year with data available to us, our largest Member sold 2.2 million MWhs.

 

POWER SUPPLY RESOURCES

We provide electric power to our Members through a combination of generating facilities that we own, contract for, lease, have undivided percentage interests in or have tolling arrangements with, and through the purchase of electric power pursuant to power purchase contracts and purchases on the open market.

 

In 2018, 58.9 percent of our energy available for sale was provided by our generation and 41.1 percent by purchased power. In 2018, we estimate that nearly a third of the energy delivered by us and our Members to our Member’s customers came from non-carbon emitting resources.

 

Depending on our system requirements and contractual obligations, we are likely to both purchase and sell electric power during the same fiscal period. We use market transactions to optimize our position by routinely purchasing power when the market price is lower than our incremental production cost and routinely selling power to the short-term market when we have excess power available above our firm commitments to both Members and non-members. We also use short-term market purchases during periods of generation outages at our facilities.

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Generating Facilities

 

We own, lease, have undivided percentage interests in, or have tolling arrangements with respect to 1,884 MWs from coal‑fired base load facilities and 973 MWs from gas/oil‑fired facilities. See “PROPERTIES” for a description of our various generating facilities.

 

On September 1, 2016, we announced that the owners of Craig Station Unit 1 intend to retire Craig Station Unit 1 by December 31, 2025, which includes our 102 MW share from such unit.

 

On September 1, 2016, we also announced we intend to retire our 100 MW Nucla Generating Station by December 31, 2022. See “— ENVIRONMENTAL REGULATIONS – Air Quality.”

 

On September 20, 2018, we closed on the purchase of an additional interest in the MBPP from Heartland Consumers Power District. Effective as of July 1, 2018, the purchase represents an additional 3 percent undivided ownership interest in MBPP, which includes transmission rights and approximately 51 MWs of generation. This purchase increases our interest in MBPP to 27.1 percent.

 

After the planned retirements of Craig Station Unit 1 and Nucla Generating Station, our interest in coal-fired base load facilities is expected to decrease to 1,686 MWs.

 

Purchased Power

 

We supplement our capacity and energy requirements not supplied by our generating facilities through long‑term purchase contracts and short‑term energy purchases. Our largest long‑term power purchase contracts are discussed below.

 

Basin. In 2017, we entered into two new amended and restated wholesale power contracts with Basin. The new wholesale power contracts amended and restated a 1975 wholesale power contract with Basin and separated the prior 1975 wholesale power contract into two wholesale power contracts: one for the Western Interconnection and one for the Eastern Interconnection.

 

The wholesale power contract for the Eastern Interconnection provides the terms under which we purchase in the Eastern Interconnection all the power which we require to serve our Members’ load in the Eastern Interconnection. The Members’ peak load in the Eastern Interconnection in 2018 was approximately 335 MWs.

 

The wholesale power contract for the Western Interconnection provides the terms under which we purchase in the Western Interconnection fixed scheduled quantities of electric power and energy. The quantity of electric power and energy varies depending on the month and hour with a maximum of 268 MWs occurring during certain hours in July.

 

Both amended and restated wholesale power contracts continue through December 31, 2050 and are subject to automatic extension thereafter until either party provides at least five years’ notice of its intent to terminate.

 

Renewables.  Our principal long-term renewable power purchase contracts are with WAPA. Substantially all of our purchases from WAPA are hydroelectric based power made at cost‑based rates under long‑standing federal law under which WAPA sells power to cooperatives, municipal electric systems and certain other “preference” customers. WAPA markets and transmits the power to us pursuant to three contracts, one relating to WAPA’s Loveland Area Project (which terminates September 30, 2024), and two contracts relating to WAPA’s Salt Lake City Area Integrated Projects (both which terminate September 30, 2024). In 2015, we entered into a new contract with WAPA relating to the Loveland Area Project for delivery of power by WAPA beginning October 1, 2024 and ending September 30, 2054. In 2018, we entered into a new contract related to Salt Lake City Area Integrated Projects for the delivery of power by WAPA beginning October 1, 2024 and ending September 30, 2057. The amount of long-term power delivery from WAPA under these two new contracts beginning on October 1, 2024 remains the same as under the existing three contracts terminating on September 30, 2024. The Loveland Area Project generally consists of generation and

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transmission facilities located in the Missouri River Basin. The Salt Lake City Area Integrated Projects consists of generation and transmission facilities located in the Colorado River Basin. The following table shows the long-term power delivery from WAPA in the summer season (April-September) and winter season (October‑March):

 

 

 

 

 

 

 

 

Resource:

    

Summer

 

    

Winter

 

 

 

(MW)

 

 

(MW)

 

Loveland Area Projects

 

349

 

 

285

 

Salt Lake City Area/Integrated Projects

 

231

 

 

247

 

Total

 

580

 

 

532

 

 

In addition to our contracts with WAPA for hydroelectric power purchases, we have entered into renewable power purchase contracts to purchase the entire output from specified renewable facilities totaling approximately 683 MWs, including 471 MWs of wind-based power purchase agreements and 185 MWs of solar-based power purchase agreements. The largest of these renewable power purchase contracts are summarized in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

  

 

  

 

  

Facility

  

Year of

  

Year of

 

 

 

 

 

 

 

Energy

 

Rating

 

Commercial

 

Contract

 

Facility Name 

 

Location

 

Counterparty

 

Source

 

(MW)

 

 Operation

 

Expiration

 

Alta Luna Solar

 

New Mexico

 

TPE Alta Luna, LLC

 

Solar

 

25

 

2017

 

2042

 

Carousel Wind Farm

 

Colorado

 

Carousel Wind Farm, LLC

 

Wind

 

150

 

2016

 

2041

 

Cimarron Solar

 

New Mexico

 

Southern Turner Cimarron I, LLC

 

Solar

 

30

 

2010

 

2035

 

Colorado Highlands Wind

 

Colorado

 

Colorado Highlands Wind, LLC

 

Wind

 

91

 

2012

 

2032

 

Crossing Trails Wind

 

Colorado

 

Crossing Trails Wind Power Project, LLC

 

Wind

 

104

 

2020

(1)

2035

(2)

Kit Carson Windpower

 

Colorado

 

Kit Carson Windpower, LLC

 

Wind

 

51

 

2010

 

2030

 

San Isabel Solar

 

Colorado

 

San Isabel Solar LLC

 

Solar

 

30

 

2016

 

2041

 

Spanish Peaks Solar

 

Colorado

 

Spanish Peaks Solar, LLC

 

Solar

 

100

 

2023

(1)

2038

(2)

Twin Buttes II Wind

 

Colorado

 

Twin Buttes Wind II, LLC

 

Wind

 

75

 

2017

 

2042

 


(1)

Anticipated year of commercial operation.

(2)

Anticipated year of contract expiration based upon anticipated year of commercial operation.

 

Other.  In 2016, we entered into a five year reciprocal agreement with PNM to sell PNM 100 MWs of power, contingent on the operation of Springerville Unit 3, and purchase from PNM 100 MWs of power, contingent on the operation of PNM’s San Juan Generating Station Unit 4. After the initial five year period, the agreement automatically renews for successive one year terms until terminated by either party. This agreement with PNM reduces our amount of needed operating reserves and reduces the amount of power we would need to purchase in the event of a forced outage of Springerville Unit 3. The net of the sales revenue and purchased power costs under this agreement is included in our purchase power expense on our consolidated statements of operations.

 

In addition to long‑term power purchase contracts, we utilize market purchases to optimize our position by routinely purchasing power when the market price is lower than our incremental production cost. We also utilize short-term market purchases during periods of generation outages. In addition, we have hazard sharing arrangements with Colorado Springs Utilities, Platte River Power Authority, and TEP, which provide for supply of power to us in the event of forced outages at specified generating facilities.

 

Power Sale Contracts

 

We have entered into various long-term power sales or tolling contracts with other entities totaling approximately 372 MWs, the largest of which are discussed below. We, through one of our wholly‑owned subsidiaries, have an agreement that expires in June 2019 to sell PSCO 122 MWs in tolling capacity from the J.M. Shafer Generating

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Station. We do not anticipate renewing this agreement with PSCO regarding the J.M. Shafer Generating Station. We have an agreement to sell Salt River Project 100 MWs of power, contingent on the operation of Springerville Unit 3, which expires in August 2036. We also have a five year reciprocal agreement to sell PNM 100 MWs of power, contingent on the operation of Springerville Unit 3. See “— POWER SUPPLY RESOURCES – Purchased Power.”

 

In addition to long‑term power sales contracts, we routinely sell power to the short‑term market when we have excess power available above our firm commitments to both Members and non‑members.

 

We are subject to varying degrees of competition related to the sale of excess power to non-members on both a short-term and long-term basis. We are subject to competition from regional utilities and merchant power suppliers with similar opportunities to generate and sell energy at market-based prices and larger trading entities that do not own or operate generating assets.

 

Fuel Supply

 

Coal.  We purchase coal under long‑term contracts. See “PROPERTIES” for a description of our investments in coal mines. The following table summarizes the sources of our coal for each of our coal‑fired generating facilities:

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Annual Tonnage—

 

 

 

 

 

 

 

Our Share

 

Generating Station

 

Mine

 

Contract End Date

 

(approximate)

 

Craig Station Units 1 and 2

 

Trapper Mine and Colowyo Mine

 

2020 and 2027, respectively

 

800,000

 

Craig Station Unit 3

 

Colowyo Mine

 

2027

 

1,300,000

 

Escalante Station

 

El Segundo Mine

 

2019

(1)

650,000 to 1,200,000

 

Laramie River Generating Station

 

Various, including Dry Fork Mine

 

2034

 

1,900,000

 

Nucla Generating Station

 

New Horizon Mine

 

2022

 

 —

(2)

Springerville Unit 3

 

North Antelope Rochelle Mine

 

2021

 

1,250,000 to 1,500,000

 


(1)

We expect to enter into a new contract prior to expiration of the current contract.

(2)

New Horizon Mine is in mine reclamation and no longer produces coal.

 

Colowyo Mine: As current mining operations in the South Taylor pit are being completed and land is being reclaimed, Colowyo Coal, a subsidiary of ours, is developing the Collom mining pit at the Colowyo Mine to access coal reserves for future production. In January 2017, Colowyo Coal received final approval of the mining plan from OSMRE. In June 2018, Colowyo Coal received an air permit from the CDPHE for the construction and operation of the Collom pit. In October 2018, Colowyo Coal received a renewal of a water/wastewater discharge permit, which now also includes the Collom pit. Coal production from the Collom pit is expected to begin sometime in 2019. See “— ENVIRONMENTAL REGULATIONS – Other Environmental Matters.”

 

Reclamation Liabilities.    In connection with our use of coal derived from coal mining facilities in which we have an ownership interest, including the Colowyo Mine, New Horizon Mine, Trapper Mine, Dry Fork Mine, and Fort Union Mine, we have obligations for certain reclamation activities mandated by state and federal laws. These liabilities are recognized and recorded on our financial statements when required by accounting guidelines. In 2018, we provided guarantees of, or self-bonds for, certain reclamation obligations of WFW and our subsidiaries. The amount of these guarantees are based upon applicable state requirements and are different than the amount of liabilities recognized on our financial statements in accordance with GAAP. We do not expect any changes in regulations that would reduce the amount we may guarantee of the reclamation obligations of WFW or our subsidiaries to have a material impact on us.

 

Natural Gas.  The majority of the natural gas we purchase is for facilities used primarily to fill peak demands. We currently purchase the majority of our gas supplies on the spot market at fixed daily prices and on occasion we enter into forward fixed‑price, fixed‑quantity physical contracts. The majority of natural gas is purchased in the Cheyenne

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Hub area, which is in close proximity to the natural gas generating facilities we tend to utilize most frequently. Six major natural gas pipelines have interconnections at the Cheyenne Hub, and presently, there is adequate supply at this location. Based on the regional forecast of production activities and pipeline capacity in the Rocky Mountain region, we presently anticipate that sufficient supplies of natural gas will be available in the foreseeable future. We have a long‑term natural gas transportation contract that provides firm rights to move natural gas from various receipt points to our facilities. Finally, we may utilize financial instruments to price hedge our forecasted natural gas requirements.

 

Oil.  Distillate fuel for the Burlington, Limon, Knutson and Pyramid Generating Stations, all simple-cycle combustion turbine facilities, is purchased on the spot market from various suppliers. Oil is transported to the respective locations via truck.

 

Water Supply

 

We use varying amounts of water for the production of steam used to drive turbines that turn generators and produce electricity in our generating facilities.

 

We maintain a water portfolio that supplies water from various sources for each of our generating facilities. This portfolio is adequate to meet the water supply requirements of our generating facilities. Our generating facilities are located in the western part of the United States where demand for available water supplies is heavy, particularly in drought conditions. Litigation and disputes over water supplies are common and sometimes protracted, which can lead to uncertainty regarding any user’s rights to available water supplies. If we become subject to adverse determinations in water rights litigation or to persistent drought conditions, we could be forced to acquire additional water supplies or to curtail generation at our facilities.

 

We are involved in a proceeding in the State of New Mexico that could impact the water rights for Escalante Station. It is an adjudication of water rights associated with the Bluewater Toltec Area to determine the past, present and future use of water rights of the Pueblos of Acoma and Laguna, which we collectively refer to as the Pueblos. Specifically, the Pueblos are seeking a determination of the volume of ground water and surface water available to them and to determine the priority of those water rights. Should the Pueblos prevail in court, permitted water rights availability for the Escalante Station will be significantly reduced, potentially requiring us to secure alternative water supplies at a cost which could potentially be higher than the cost of the water supplies currently being used.

 

We are also involved in proceedings in the State of Colorado related to the water rights of Burlington Generating Station and J.M. Shafer Generating Station. In the proceeding related to Burlington Generating Station, Plaintiff Hutton Foundation filed a complaint in the Water Court for Water Division No. 1 seeking relief that would require the state engineer to administer ground water in conjunction with surface water in order to meet Colorado’s obligations under the Republican River Compact. Based upon the plaintiff’s disclosures, our water rights for Burlington Generating Station are not expected to be within scope of the water rights at issue in the proceeding. In the proceeding related to J.M. Shafer Generating Station, we have filed for water rights to serve the J.M. Shafer Generating Station and the application is pending in the Water Court for Water Division No. 1. The application seeks a change in water rights, among other relief. The water rights sought are for a backup supply for J.M. Shafer Generating Station, and an adverse outcome is not anticipated to substantially affect the availability of water necessary to operate the J.M. Shafer Generating Station.

 

Resource Planning

 

We continuously evaluate potential resources required to serve the long‑term requirements of our Members. As part of our approach to resource planning, we evaluate various resource options including the construction of new resources and long-term power purchase contracts. In evaluating future renewable portfolio additions, we monitor market conditions, tax credit expiration schedules, impacts of current renewable resources on reliable system operations and the operation of existing generation assets, transmission system capacity, our potential participation in an organized market in the Western Interconnection, and the regulatory requirements for meeting RPS. Consistent with this strategy, our most recent request for proposal and subsequent award of power purchase agreements for 104 MWs of wind and

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100 MWs of solar allowed us to add cost effective resources to our power supply portfolio. Based upon our current Member load/resource balance forecast, we do not anticipate the need for additional capacity prior to 2026.

 

As part of our long-term resource planning, we have acquired real estate interests and water rights for a project called the Colorado Power Project located near Holly, Colorado. Through December 2018, we have incurred development costs of approximately $71.7 million, which is primarily the cost for the purchase of certain water rights and real estate interests, in connection with the Colorado Power Project. We have not yet selected a fuel or generation technology for this development, and we have not applied for an air permit for this development.

 

Over the past decade, in a joint effort with Sunflower, a Kansas generation and transmission cooperative, and others, we have pursued development of approximately 895 MWs of coal‑fired base load generating capacity to be located near Holcomb, Kansas, at the site of the existing Holcomb Generating Station. There were several legal challenges to the expansion of the Holcomb Generating Station, including challenges to the air permit and to the effectiveness of RUS consents to Sunflower’s development contracts with us. On March 17, 2017, the Kansas Supreme Court issued a decision upholding the air permit for one unit at Holcomb Generating Station of 895 MWs. On September 25, 2018, the Kansas Department of Health and Environment approved an additional 18 month extension to commence construction under the current air permit. This period ends on March 27, 2020. Although a final decision has not been made by our Board on whether to proceed with the construction of the project, including us exercising our option to acquire the development rights, we determined during the second quarter of 2017, the probability of us entering into construction for the project was remote. 

 

TRANSMISSION

We have ownership or capacity interests in approximately 5,665 miles of high‑voltage transmission lines and own or have major equipment ownership in approximately 409 substations and switchyards. See “PROPERTIES” for a description of our transmission facilities.

 

Our system is interconnected with those of other utilities, including WAPA, NPPD, Black Hills Colorado Electric, Inc., PacifiCorp, PSCO, Platte River Power Authority, Colorado Springs Utilities, Basin, TEP, PNM and Deseret Generation & Transmission Cooperative. The majority of our transmission facilities operate as part of the Western Interconnection. The Western Interconnection consists of transmission assets that link generating facilities to load centers throughout the region. A small portion of our facilities support our load centers in the Eastern Interconnection. We continue to make the capital investment necessary to expand our transmission infrastructure and participate in many joint projects with other transmission owners to provide electric service to our Members.

 

In 2015, our Board approved us becoming a “transmission-owning member” of SPP, a regional transmission organization, for our transmission facilities and loads that are located in the Eastern Interconnection and constitute about 4.5 percent of our total loads and transmission facilities. We are now subject to greater oversight by FERC, including review of our costs of providing transmission service in the Eastern Interconnection, and must comply with the requirements of SPP, which is also subject to FERC jurisdiction. On October 30, 2015, SPP filed revisions to its OATT to add an annual transmission revenue requirement and to implement a formula rate template and implementation protocols for those Eastern Interconnection transmission facilities on behalf of us for transmission service beginning January 1, 2016. NPPD filed motions protesting the October 2015 filing. On December 30, 2015, FERC issued an order accepting the formula rate subject to refund and setting it for settlement and hearing judge procedures. The settlement and hearing commenced in 2016 and involved two parts. The first part being the formula rate determinations, which were to be settled amongst the parties, and the second part being SPP’s zonal placement of our transmission facilities that are located in the Eastern Interconnection, which could not be settled and a hearing took place in November 2016. The parties settled the formula rate part of this matter and the settlement was filed with FERC on February 22, 2017 and approved by FERC on April 28, 2017. On February 23, 2017, the Administrative Law Judge issued an initial decision recommending that FERC approve SPP’s zonal placement of our transmission facilities on the zonal placement part. On May 17, 2018, FERC affirmed the initial decision and no refund was owed by us on this part of the matter.  On June 15, 2018, NPPD filed with FERC a request seeking rehearing of FERC’s May 17, 2018 order. On January 15, 2019, FERC denied NPPD’s request for rehearing.

 

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On August 21, 2018, NPPD filed with FERC a complaint against us and SPP pursuant to Sections 206 and 306 of the FPA requesting FERC to find the inclusion of certain of our costs in our annual transmission revenue requirement causes SPP’s OATT to be unjust and unreasonable. On September 17, 2018, SPP filed a motion to dismiss and alternative answer and we filed an answer requesting that FERC deny NPPD’s complaint. On December 20, 2018, FERC issued an order denying the complaint. On January 18, 2019, NPPD filed with FERC a request seeking rehearing of FERC’s December 20, 2018 order.

 

We, along with nine other participants, formed an informal group known as the MWTG to develop strategies to adapt to the changing electric industry in the Rocky Mountain region of the Western Interconnection. In January 2017, the MWTG began discussions with the SPP, to explore potential membership. In September 2017, the MWTG announced plans to commence negotiations with SPP regarding membership. This announcement initiated a formal SPP public stakeholder process. In March 2018, the SPP board of directors approved a set of policies defining the terms and conditions of MWTG’s potential membership in SPP. In April 2018, PSCO announced it was ending its participation in the MWTG. With this announcement, the MWTG effort has ceased, however, we continue to evaluate our options to provide benefits to our system in the Western Interconnection.

 

FERC

The FPA authorizes FERC to oversee the sale at wholesale and transmission of electricity in interstate commerce by public utilities, as that term is defined in the FPA. We are not subject to the general “public utility” regulation of FERC under the FPA because of the exempt status of our Members. See “— RATE REGULATION.”  FERC requires non‑public utilities such as us to comply with several requirements that are applicable to public utilities, including the requirements to provide open access transmission service and engage in regional planning of transmission facilities, as a condition of obtaining transmission service from public utilities. We are also subject to certain reporting obligations applicable to all electric utilities, other FERC orders to the extent that they apply generally to non‑public utilities, and FERC’s oversight with respect to transmission planning, investment and siting, reliability standards, price transparency, and market manipulation. We are subject to certain regulations issued by FERC pursuant to the Energy Policy Act of 1992 and the Energy Policy Act of 2005 with respect to the provision of certain transmission services. 

 

Open Access Transmission Service

 

Use of our transmission facilities is governed by OATTs. This arrangement flows from Order Nos. 888, 890, and 1000, which FERC issued in 1996, 2007 and 2011, respectively, as a means of promoting universal, non‑discriminatory and “open” access to the nation’s transmission grid. Open access generally gives all potential users of the transmission grid an equal opportunity to obtain the transmission service necessary to support purchases or sales of electric energy, thereby promoting competition in wholesale energy markets. In these orders, FERC generally required all transmission‑owning public utilities to provide transmission service on an open access basis. FERC also extended the open access requirement to non‑public utilities (such as us) through a reciprocity requirement whereby a non‑public utility receiving transmission service under a public utility’s OATT must provide to the transmission service provider comparable open access to the non‑public utility’s own transmission facilities. Thus, we are obligated to offer reciprocal service over our transmission facilities to those public utilities from which we receive open access transmission service, on a basis comparable to our use of their transmission facilities. Since 2001, we have offered transmission service under an OATT for service across our system on a non‑discriminatory basis. Because we are not a public utility, we are not required to formally file this OATT with FERC, and our OATT rates for transmission service provided in the Western Interconnection are not subject to FERC’s public utility rate review. Beginning January 1, 2016, use of our Eastern Interconnection transmission facilities is governed by the SPP OATT and our costs of providing transmission service in the Eastern Interconnection are subject to review by FERC.

 

As a non‑public utility, we are not required to implement the FERC Standards of Conduct which require separation between transmission operations and merchant operations (other than in connection with the reciprocity requirement described above). To ensure our compliance with the reciprocity requirement and contractual obligations relating to confidentiality and non‑disclosure of protected transmission information, we have implemented FERC’s Standards of Conduct procedures, including procedures for transmission data confidentiality, by creating a physical and functional separation of protected transmission data from our employees and agents engaged in merchant functions.

 

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FERC has express, statutory authority under Section 211A of the FPA to require “unregulated transmitting utilities” (such as us) to provide transmission service to all qualified customers on an open access basis at rates and terms that are comparable to those that the utility employs in using its own system. In Order No. 890, FERC stated that it may take action under Section 211A with respect to non‑public utilities that do not adopt the OATT modifications that FERC required public utilities to adopt. We have not been the subject of an order under Section 211A.

 

FERC has additional oversight authority over us under Sections 210 and 211 of the FPA, which apply to all transmitting utilities. Under these sections, FERC may, upon application by a customer, compel a utility to provide interconnection and transmission service to that customer, subject to appropriate compensation. We have not been the subject of an order under these provisions of the FPA.

 

Transmission Planning

 

FERC has become increasingly involved in promoting the development of the transmission grid. Prior to the 1990’s, most grid expansion planning was undertaken on a local basis, as utilities and, if applicable, state regulators determined which investments were appropriate to serve local customers. In Order No. 888, FERC encouraged utilities to coordinate their planning efforts with the expectation that integrated planning would better accommodate the development of regional, wholesale energy markets. In Order No. 890, FERC expressly required coordinated transmission planning, established governing principles, and cautioned that if non‑public utilities did not participate in coordinated transmission planning, FERC may compel them to do so. We comply with this requirement through our participation in WECC, WestConnect, SPP, and other sub‑regional transmission planning groups and processes. In Order No. 1000, FERC required all public utilities to engage in regional and interregional transmission planning and cost allocation. As it did with respect to open access transmission service, FERC stated that it may take action under Section 211A with respect to non‑public utilities that do not comply with the requirements of Order No. 1000; however, FERC provides deference to non‑public utilities to encourage their participation, in particular by not requiring non‑public utilities to accept mandatory cost allocation. We voluntarily comply with Order No. 1000 by participating in regional and interregional transmission planning and cost allocation processes in SPP and WestConnect. In conjunction with other utilities in the surrounding geographic area, we participate in WestConnect, a voluntary organization of transmission providers committed to assessing stakeholder needs in the Southwest. The participants in WestConnect own and operate transmission systems in all or parts of the states of Arizona, New Mexico, Colorado, Wyoming, Nevada, and California. In December 2014, we signed the WestConnect Planning Participation Agreement, which governs the WestConnect Order No. 1000 planning process.

 

FERC has also provided for rate incentives for public utilities as a means of encouraging investment in new transmission facilities. Although FERC’s incentive program is focused on public utilities, FERC has encouraged non‑public utilities to participate in new transmission projects and has suggested that non‑public utilities may propose incentives. Recent approvals by FERC of rate incentives for transmission projects in our region and elsewhere have provided us with practical guidance as to the applicability of these incentives to potential future transmission projects.

 

Reliability

 

Section 215 of the FPA authorizes FERC to oversee the reliable operation of the nation’s interconnected bulk power system. In 2007, FERC approved mandatory national reliability standards for administration by NERC. The national standards apply to all utilities that own, operate, and/or use generating or transmission facilities as part of the interconnected bulk power system. As an owner, operator and user of generation and transmission facilities, we are subject to some of these reliability standards. Under the national standards, utilities must, among other things, respond to emergencies within stated time periods, maintain prescribed levels of generation reserves, and follow instructions concerning load shedding. In 2007, FERC also approved limited delegations of authority from NERC to eight regional entities. The delegations authorize each regional entity to propose regional reliability standards for their respective regions that would supplement or exceed the national standards. NERC has also delegated to the regional entities the authority to monitor and enforce compliance with the regional and national reliability standards, subject to NERC and FERC review.

 

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Currently Peak Reliability performs the reliability coordination and interchange authority functions as required under the NERC standards in the Western Interconnection. Peak Reliability has announced it will no longer be providing service after December 31, 2019. We expect to obtain the reliability coordinator service from SPP and CAISO based upon the applicable balancing authority.

 

We are registered in two of the eight regional entities: WECC and MRO. WECC and MRO seek to sustain and improve the reliability of the electric grid through regional coordination, standard setting, certification of grid operators, reliability assessments, coordinated regional planning and operations, and dispute resolution. In addition, our generating facilities are included in two regional reserve sharing pools: the Rocky Mountain Reserve Group and the Southwest Reserve Sharing Group. These pools facilitate sharing of generation reserves to be activated during a system emergency such as loss of a generating unit or transmission line.

 

We have an active compliance monitoring program that covers all aspects of our generation and transmission reliability responsibilities. We also collaborate with our Members on areas where transmission and distribution system reliability responsibilities overlap. NERC and its regional entities, including WECC and MRO, periodically audit compliance with reliability standards. In addition to audits and spot‑checks (unscheduled audits), NERC and its regional entities, including WECC and MRO, also are authorized to conduct other types of investigations, including requiring annual “self‑certifications” of compliance with select reliability standards. In 2015, NERC approved our participation in a new coordinated oversight program as a MRRE, whereby WECC was designated as our Lead Regional Entity. The intent of the MRRE program is to streamline compliance and enforcement efforts for entities registered in multiple regions.

 

In 2018, we were audited by WECC and are scheduled for a future compliance audit in 2021 as part of a three-year routine audit cycle. WECC is still evaluating the preliminary findings of the 2018 audit, however, we do not expect there to be any significant enforcement actions. WECC stated that they have noticed the improvements we have made in our compliance implementation and have a good culture of compliance.

 

ENVIRONMENTAL REGULATION

We are subject to various federal, state and local laws, rules and regulations with regard to the following:

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air quality, including greenhouse gases,

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water quality, and

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other environmental matters.

 

These laws, rules and regulations often require us to undertake considerable efforts and incur substantial costs to maintain compliance and obtain licenses, permits and approvals from various federal, state and local agencies. To comply with existing environmental regulations, we expect that we will spend approximately $14 million through 2023 in efforts to maintain compliance. We estimate that we spend over $500,000 per year in permit‑related fees, as well as increased operating costs to ensure compliance with environmental standards of the Clean Air Act, described below. If we fail to comply with these laws, regulations, licenses, permits or approvals, we could be held civilly or criminally liable.

 

Our operations are subject to environmental laws and regulations that are complex, change frequently and have become more stringent and numerous over time. Federal, state and local standards and procedures that regulate the environmental impact of our operations are subject to change. These changes may arise from continuing legislative, regulatory and judicial actions regarding such standards and procedures. Consequently, there is no assurance that environmental regulations applicable to our facilities will not become materially more stringent, or that we will always be able to obtain all required operating permits. An inability to comply with environmental standards could result in reduced operating levels or the complete shutdown of our facilities that are not in compliance. We cannot predict at this time whether any additional legislation or rules will be enacted which will affect our operations, and if such laws or rules are enacted, what the cost to us might be in the future because of such actions.

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From time to time, we are alleged to be in violation or in default under orders, statutes, rules, regulations, permits or compliance plans relating to the environment. Additionally, we may need to deal with notices of violation, enforcement proceedings or challenges to construction or operating permits. In addition, we may be involved in legal proceedings arising in the ordinary course of business.

 

Since 1971, we have had in place a Board Policy for Environmental Compliance that is reviewed each year by our Board. The policy commits us to comply with all environmental laws and regulations. The policy also calls for the enforcement of an internal EMS. We have developed, implemented, and continuously improved the EMS over the last seventeen years. The EMS meets the EPA guidance for management systems and consists of policies, procedures, practices and guides that assign responsibility and help ensure compliance with environmental regulations.

 

Air Quality

The Clean Air Act.  Pursuant to the Clean Air Act, the EPA has adopted standards regulating the emission of air pollutants from generating facilities and other types of air emission sources, establishing national air quality standards for major pollutants, and requiring permitting of both new and existing sources of air pollution. The Clean Air Act requires that the EPA periodically review, and revise if necessary, its adopted emission standards and national ambient air quality standards. Both of these actions can impose additional emission control and compliance requirements, increasing capital and operating costs. Among the provisions of the Clean Air Act that affect our operations are (1) the acid rain program, which requires nationwide reductions of SO2 and NOx from existing and new fossil fuel‑based generating facilities, (2) provisions related to major sources of toxic or hazardous pollutants, (3) New Source Review, which includes requirements for new plants that are major sources and modifications to existing major source plants, (4) National Ambient Air Quality Standards that establish ambient limits for criteria pollutants, and (5) requirements to address visibility impacts from regional haze. Many of the existing and proposed regulations under the Clean Air Act impact coal‑fired generating facilities to a greater extent than other sources.

 

Our facilities are currently equipped with pollution controls that limit emissions of SO2, NOx, and particulates below the requirements of the Clean Air Act and our permits. As needed, some specified units have appropriate mercury emission controls. We have pollution control equipment on each of our generating facilities. All three units at Craig Station have scrubbers to remove SO2, baghouses for particulate removal and low NOx burners. Craig Station Unit 2 has selective catalytic reduction equipment for NOx control. Craig Station Unit 3 has selective non-catalytic reduction equipment for NOx control and an activated carbon injection system to control mercury emissions. Escalante Station has scrubbers to remove SO2, baghouses for particulate removal, a laser-based system to optimize combustion for NOx emissions, and an activated carbon injection system to control mercury emissions. Springerville Unit 3 has scrubbers to remove SO2, baghouses for particulate removal, low NOx burners and selective catalytic reduction equipment for NOx control, and an activated carbon injection system for controlling mercury emissions. Nucla Generating Station includes a circulating fluidized bed with limestone for SO2 removal, dry sorbent injection for hydrochloric acid removal, baghouses for particulate removal, and a selective non-catalytic reduction system for NOx control.

 

Basin, as the operator for the Laramie River Generating Station, is responsible for environmental compliance and reporting for that facility. TEP is the operator of Springerville Unit 3 and is responsible for environmental compliance of that station. Springerville Unit 3 operates under a Title V air permit that was issued for all Springerville Generating Station units. Springerville Unit 3 was designed and constructed to comply with permitted Best Available Control Technology emission standards. If liabilities arise as a result of a failure of environmental compliance at Laramie River Generating Station or Springerville Unit 3, our respective responsibility for those liabilities is governed by the operating agreements for the facilities.

 

We own and operate combustion turbine generating facilities that burn natural gas and/or fuel oil at five locations in Colorado and one in New Mexico. The combustion turbines are subject to emission limits lower than those of coal‑fired generating facilities. All units have the necessary air and water permits in place and are operated in accordance with regulatory provisions. Steam turbine facilities include steam injection to control NOx emissions by lowering thermal NOx formation.

 

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Acid Rain Program.  The acid rain program requires nationwide reductions of SO2 and NOx emissions by reducing allowable emission rates and by allocating emission allowances to generating facilities for SO2 emissions based on historical or calculated levels, and reducing allowable NOx emission rates. An emission allowance, which gives the holder the authority to emit one ton of SO2 during a calendar year, is transferable and can be bought, sold or banked in the years following its issuance. Allowances are issued by the EPA. The aggregate nationwide emissions of SO2 from all affected units are now capped at 8.95 million tons per year. We receive and hold sufficient SO2 allowances for compliance with the acid rain program and send excess allowances back to our general account. Allowances have been issued by EPA through compliance year 2046 and we have additional general account allowances that would provide for additional years based on our current usage rate.

 

Greenhouse Gas Regulation.    On October 23, 2015, the EPA published in the Federal Register a final rule regarding emission limits and emission guidelines of CO2 for existing generating facilities in a comprehensive rule referred to as the “Clean Power Plan.” The Clean Power Plan established guidelines for states to develop plans to limit emissions of CO2 from existing units. The goal of the rule was a reduction in CO2 emissions from 2005 levels of 32 percent nationwide by 2030 and specifies interim emission rates phasing in between 2022 and 2029.

 

On February 9, 2016, the United States Supreme Court granted numerous applications to stay the Clean Power Plan pending judicial review. On October 16, 2017, the EPA published a proposal to repeal the Clean Power Plan. We submitted comments on April 26, 2018. If the Clean Power Plan is upheld by the courts, as finalized, it could have a material impact on our operations, including increased operating costs, additional investment in new generation (natural gas and renewables) and transmission, investment in energy efficiency programs and decreased operation, or closure of coal-fired generating facilities.  

 

On August 31, 2018, the EPA published in the Federal Register a proposed rule regarding emission guidelines for greenhouse gas emissions from existing generating units, commonly referred to as the Affordable Clean Energy rule. The Affordable Clean Energy rule is intended to replace the Clean Power Plan. The Affordable Clean Energy rule would establish guidelines for states to follow in developing limitations (i.e., standards of performance) for CO2 emissions from existing units, based on an EPA determination that the best system of emission reduction is heat rate improvement. While the Affordable Clean Energy rule establishes that requirements be achievable based on adequately demonstrated technology, implementation of the rule will be at the state level, and it is too early to know how each state in which we operate will administer the rule. If a state implements a very strict interpretation of the rule, it may have a material impact on our operations. We submitted comments on the rule on October 31, 2018.

 

The EPA also issued a final NSPS for new units, which established CO2 emission standards for new, modified and reconstructed units. This NSPS did not create emission standards for the expansion of the Holcomb Generating Station, but states that if the expansion moves forward and it is determined that construction did not commence prior to January 8, 2014, the EPA may create a separate rule for the expansion of the Holcomb Generating Station. We, along with 25 states, other utilities and national trade organizations, filed petitions for review of the NSPS with the D.C. Circuit Court of Appeals. On April 4, 2017, the EPA published in the Federal Register a notice that the EPA is reviewing and, if appropriate, will initiate proceedings to suspend, revise or rescind this NSPS. On August 8, 2017, the D.C. Circuit Court of Appeals issued an order to hold the legal proceeding in abeyance indefinitely and directed the EPA to file status reports at ninety-day intervals beginning October 27, 2017.

 

On December 20, 2018, the EPA published a proposed rule to revise the NSPS for new, modified, and reconstructed units. The proposal would not change how the expansion of the Holcomb Generating Station is addressed.

 

Mercury and other Hazardous Air Pollutants.  The Clean Air Act also provides for a comprehensive program for the control of hazardous air pollutants, including mercury. The EPA must treat mercury as a “hazardous air pollutant” subject to a requirement to install MACT in new and existing units. In 2012, the EPA finalized a MACT rulemaking with emissions standards across four categories of emissions. We believe we are in compliance with the rule’s emission limits at our generating facilities and have the appropriate emission controls.

 

On December 26, 2018, the EPA signed a proposed rule to reconsider a supplemental finding related to the MACT rulemaking that has to do with consideration of costs. The proposal would not change the compliance

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obligations. In addition, the recently-signed proposal would offer EPA’s statutorily-required residual risk and technology review, the results of which are that current standards are protective and no new developments in hazardous air pollutant controls to achieve further cost-effective emission reductions were identified. We are evaluating the proposal and may comment by the applicable deadline.

 

New Mexico, Colorado and Arizona adopted rules that require mercury monitoring and contain emission limits. Our coal‑fired facilities are subject to these regulations. We have installed mercury monitors and comply with the state rules. In light of the federal rule, New Mexico repealed its state rule in 2014 and Colorado in 2015 amended its state rule to lessen the regulatory burden.

 

New Source Review.  Section 114(a) Information Requests related to New Source Review Program Requirements. Over the past decade, the United States Department of Justice, on behalf of the EPA, has brought enforcement actions against owners of coal‑fired facilities alleging violations of the New Source Review provisions of the Clean Air Act in cases where emissions increased without commensurate installation or upgrades of pollution controls. Such enforcement actions were brought against facilities after review by the EPA of operations and maintenance records of the facilities. The EPA has the authority to review such records pursuant to Section 114 of the Clean Air Act. To date, we have not been issued an information request for EPA review of the records of any of our facilities, and therefore, are not involved in any enforcement action from past operational and maintenance activities.

 

National Ambient Air Quality Standards.  In October 2015, the EPA lowered the NAAQS for ozone from 75 ppb to 70 ppb. The J.M. Shafer Generating Station and Knutson Generating Station are located in the DM/NFR ozone nonattainment area. The DM/NFR area did not meet the 2008 ozone NAAQS of 75 ppb and this area is not anticipated to meet the 2015 ozone NAAQS that was set at 70 ppb. Currently, it is not anticipated that additional areas will be designated as nonattainment for the more stringent 2015 ozone standard. It is expected that the DM/NFR ozone nonattainment area will be required to submit a plan to comply with the 2015 ozone NAAQS by 2021. Implementation of an ozone standard of 70 ppb will require the evaluation of additional emission controls for all major sources in the DM/NFR nonattainment area. Additional emission controls may or may not be required at the J.M. Shafer Generating Station and the Knutson Generating Station.

 

Regional Haze.  On June 15, 2005, the EPA issued the Clean Air Visibility Rule, amending its 1999 Regional Haze Rule, which had established timelines for states to improve visibility in national parks and wilderness areas throughout the United States. Under the amended rule, certain types of older sources may be required to install BART and states were to establish Reasonable Progress Goals in SIPs to meet a 2064 goal of natural visibility conditions. The amended Regional Haze Rule could require additional controls for particulate matter, SO2 and NOx emissions from utility sources.

 

The states were required to develop their regional haze implementation plans by December 2007, identifying the facilities that would need to undergo BART determinations. The Reasonable Progress phase of meeting the Regional Haze Rule is the development of periodic visibility goals in order to meet a 2064 goal of natural visibility conditions. The Reasonable Progress phase SIPs establish standards and a timeline for meeting visibility goals. Colorado, New Mexico, Wyoming and Arizona developed SIPs. Each state was challenged by the EPA and legal processes are in various stages of completion.

 

Craig Station Units 1 and 2 are subject to BART. In 2007, the State of Colorado determined that the upgraded pollution controls completed in 2004, which included replacement of electrostatic precipitator units with baghouses to increase particulate removal, upgraded scrubbers to increase SO2 removal and the installation of low NOx burners, met the BART rule; therefore, no additional controls were necessary. The original BART determinations were part of Colorado’s SIP, which was not approved by the EPA. The EPA informed Colorado that the EPA would not approve the SIP; therefore, the state launched a new SIP rulemaking effort. Colorado created a new SIP with more stringent SO2 and NOx emission limits for Craig Station Units 1, 2 and 3. Under the existing, approved SIP, we committed to NOx emissions rates that resulted in the installation of selective catalytic reduction on Craig Station Unit 2.

 

The existing, approved SIP increased the stringency of emissions limits on Craig Station Units 1 and 3 (although not to the same extent as the emissions limits on Craig Station Unit 2), significantly limiting the amount of

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additional controls required on those units. The WildEarth Guardians and National Parks Conservation Association filed a lawsuit against EPA for approving the plan and we entered a court‑ordered mediation process. The result of mediation was a settlement agreement that committed us to a NOx emission rate limit for Craig Station Unit 1 that would have required installation of selective catalytic reduction by August 31, 2021. The legislature of Colorado approved the new rule and delivered it to the EPA for review.

 

On September 1, 2016, we announced that the owners of Craig Station Unit 1 reached an agreement with the CDPHE, the EPA, WildEarth Guardians and the National Parks Conservation Association to revise Colorado’s SIP. Under the proposed revision to the SIP, the owners of Craig Station Unit 1 intend to retire Craig Station Unit 1 by December 31, 2025. No installation of selective catalytic reduction will be required prior to its retirement in order to meet a NOx emission rate limit for Craig Station Unit 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, 2022. Several procedural steps were required to implement the terms of the agreement, including approval by the Colorado Air Quality Control Commission, the state legislature and the EPA. These steps are now complete.

 

Any source that emits SO2, NOx, and particulates and that may contribute to the degradation of visibility in national parks and wilderness areas, identified as Class I areas, could be subject to additional controls. New Mexico opted to comply with SO2 provisions of the Regional Haze Rule by putting in place a backstop SO2  trading program. Arizona and New Mexico evaluated NOx emission impacts on visibility and moved forward to develop Reasonable Progress rules for NOx reductions. New Mexico’s plan includes the closure of two units at San Juan Generating Station, including Unit 3, but neither state’s current plan requirements affect our current assets. Wyoming developed a SIP that required low NOx burners and overfire air at Laramie River Generating Station; however, the EPA instead proposed a Federal Implementation Plan that also requires selective catalytic reduction. The Federal Implementation Plan was under administrative and legal challenges and a tentative settlement was reached in late 2016. If the EPA confirms the proposed settlement, requirements will include installation of selective catalytic reduction on Laramie River Generating Station Unit 1 by July 1, 2019. Selective non-catalytic reduction is operational on Laramie River Generating Station Units 2 and 3.

 

The Regional Haze Rule requires that states assess progress under their state plans every five years, and periodically revise their SIPs every ten years. Therefore, like many environmental requirements, the Regional Haze Rule could require further reductions if needed to meet Reasonable Progress goals in the future.

 

State Implementation Plans.  On June 12, 2015, the EPA published a final action in the Federal Register that takes action under the Clean Air Act, enacting SIP calls in states to change provisions to the current affirmative defense to civil penalties used by permitted sources, including electric utilities, in the event they have emissions during a startup, shutdown or malfunction event that are in excess of permitted limits. States retain broad discretion concerning how to revise their SIP, so long as that revision is consistent with the requirements of the Clean Air Act. The EPA issued the SIP call for 36 states, including Arizona, Colorado, New Mexico, and Wyoming. The EPA established a deadline of November 22, 2016, by which those states must have made SIP submissions to rectify the specifically identified deficiencies in their respective SIPs. Colorado completed a rulemaking process wherein the affirmative defense provisions were retained in federal court proceedings, should a federal court wish to consider the affirmative defense provisions. New Mexico and Arizona completed rulemakings wherein the affirmative defense provisions were removed from SIPs and maintained as state regulatory provisions. At this time, we cannot predict the outcome of the EPA’s consideration of these submittals.

 

Water Quality

 

The Clean Water Act.  The Clean Water Act regulates the discharge of process wastewater and certain storm water under the NPDES permit program. At the present time, we have the required permits under the program for all of our generating facilities. The water quality regulations require us to comply with each state’s water quality standards, including sampling and monitoring of the waters around affected plants.

 

As permitted by the State of Colorado under the Colorado Discharge Permit System (a delegated NPDES program), Nucla Generating Station and Rifle Generating Station each discharge process wastewater to nearby water

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bodies. Nucla Generating Station discharges to the San Miguel River through a pond system that was upgraded in 1997 and Rifle Generating Station discharges to a dry ditch (unnamed tributary to Dry Creek) that flows to the Colorado River. J.M. Shafer Generating Station discharges indirectly under an EPA pretreatment permit to the City of Fort Lupton wastewater treatment facility through a pond system. Our other facilities have on‑site containment ponds where water is evaporated and have no surface water discharges. We also have NPDES storm water permits for Craig Station, Nucla Generating Station and Nucla Ash Site, and Escalante Station. We maintain Stormwater Pollution Prevention Plans as required in the stormwater permits to ensure that stormwater run‑off is not impacted by industrial operations. We currently have construction stormwater permits for numerous transmission line and generation construction projects. These construction permits will be terminated once adequate vegetation is established at the sites, which can take several growing seasons. Escalante Station and Pyramid Generating Station have groundwater discharge permits administered by the New Mexico Environment Department, which governs the pond systems at both facilities and on‑site ash landfill at Escalante Station. The pond systems are designed to reuse or store and evaporate water.

 

Section 316(b) of the Clean Water Act requires the EPA to ensure that the location, design, construction and capacity of cooling water intake structures reflect the best technology available to protect aquatic organisms from being killed or injured by impingement or entrainment. Section 316(b) is applicable to Craig Station and Nucla Generating Station; however, impacts are minor as the facilities operate closed cycle cooling systems minimizing impingement and entrainment.

 

In April 2014, the EPA and the Corps proposed an expansion of regulatory authority under the Clean Water Act and other statutes through broadening the definition of WOTUS. We submitted comments on the proposed rule in November 2014, identifying clarifications needed on the applicability of the ditch and waste treatment system exclusions. A final redefinition of WOTUS was published in the Federal Register on June 29, 2015. In August 2015, the United States District Court for the District of North Dakota enjoined the rule for the states within its district, which includes the states in which we have operations. In October 2016, the United States Court of Appeals for the Sixth Circuit issued a nationwide stay. On January 22, 2018, the United States Supreme Court issued a decision that the federal district courts have jurisdiction, rather than the appeals courts, over the various challenges filed against the rule. Due to the North Dakota District Court injunction of the 2015 rule, it is not in effect within our service territory. On March 6, 2017, the EPA published in the Federal Register a notice that it intended to revise and rescind or revise the 2015 rule and identified a two-step process regarding the definition of WOTUS. Step one was a proposal to withdraw the 2015 definition of WOTUS, which was published on July 27, 2017. We commented in September 2017 in support of the proposal and again in August 2018 during a supplemental comment period. Step two is a proposed new WOTUS definition, a proposed version of which was signed by the EPA on December 11, 2018. We are evaluating the proposal and may comment by the applicable deadline.

 

Spill Prevention Control and Countermeasures.  The EPA issued regulations governing the development of Spill Prevention Control and Countermeasures plans. Some of our substation and generation sites are subject to these regulations and all Spill Prevention Control and Countermeasures plans have been updated to meet the new regulations.

 

Other Environmental Matters

 

Coal Ash.  We manage coal combustion by‑products such as fly ash, bottom ash and scrubber sludge by removing excess water and placing the by-products in land-based units in a dry form. At Craig Station, the combustion by‑products are used for mine land reclamation at the adjacent coal mine. At Nucla Generating Station and Escalante Station, the combustion by‑products are placed in designated landfills. The mine‑fill and landfills are regulated by state environmental agencies and all required permits are in place. In 2010, the EPA proposed two options for regulating combustion by‑products under RCRA. One option is regulation as a solid waste under RCRA Subtitle D; the second option is regulation as a hazardous waste under Subtitle C. The EPA in December 2014 announced that it chose to pursue regulations as a solid waste under Subtitle D of RCRA. The final Coal Combustion Residual rule was published in the Federal Register on April 17, 2015. The rule contains varying deadlines for the various compliance obligations, some of which needed to be met by the initial compliance deadline of October 19, 2015. The final federal rule is self-implementing and thus affected facilities must comply with the new regulations even if states do not adopt the rule. We estimate our total costs relating to the management of such by‑products to be approximately $10 million over the life of our facilities. We are meeting all initial compliance obligations that became effective on October 19, 2015. In December

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2016, Congress passed the WIIN Act. The WIIN Act provides for the establishment of state and EPA permit programs for coal ash. The Act provides flexibility for states to incorporate the EPA final rule for coal combustion residuals or develop other criteria that are at least as protective as the final rule. The WIIN Act was signed into law by President Obama on December 16, 2016. At this time, we are monitoring state actions and cannot predict state actions or impacts. The EPA is expected to release a proposed rule to address several technical and compliance-related issues pursuant to a settlement from litigation about the Coal Combustion Residuals rule, and perhaps additional issues. Until that rule is proposed it is not possible to estimate impacts to our operations.

 

Renewable Portfolio Standards.  Colorado law requires our Colorado Members to obtain at least 6 percent and 10 percent of their energy requirements from renewable sources by year end 2015 and 2020, respectively. In 2013, Colorado law was amended to add a separate RPS requirement requiring that at least 20 percent of the energy we provide to our Colorado Members at wholesale come from renewable sources by 2020 and each year thereafter. Colorado law permits us to count renewable sources utilized by our Colorado Members for their RPS requirement towards compliance with our separate RPS requirement. New Mexico law requires our New Mexico Members to obtain 5 percent of their energy requirements from renewable sources by January 1, 2015, and increases that amount by 1 percent annually until 10 percent is achieved in 2020. Under the wholesale electric service contracts with our Members, our Members may elect to provide up to 5 percent of their requirements from distributed or renewable generation owned or controlled by them. We currently provide sufficient energy from renewable sources to meet our Members’ current obligations under the RPS requirements and expect to be able to continue meeting our Members’ RPS obligations through 2020 to the extent a Member does not meet its obligation with renewable generation owned or controlled by such Member as permitted under our wholesale electric service contract. We expect to be able to achieve compliance with our separate RPS that requires 20 percent of the energy we provide to our Colorado Members at wholesale come from renewable sources by 2020. The newly elected Governors in Colorado and New Mexico ran on platforms to increase the RPS in their respective states. Until a final rule is enacted in each of these states, it is not possible to estimate impacts to our operations.

 

Global Climate Change Regulatory Developments Outside the Clean Air Act.  Consideration of laws and regulations to limit emissions of greenhouse gases is underway at the international, national, regional and state levels. International negotiations will determine what, if any, specific commitments to reduce greenhouse gas emissions will be made by all countries that are party to the United Nations Framework Convention on Climate Change, including the United States. The outcome of the 21st Conference of the Parties held by the United Nations in Paris during December 2015 is a broad international agreement based on non-binding commitments with no enforcement provisions known as the Paris Agreement; therefore, the agreement will not directly dictate any particular emission reduction obligations for United States businesses. Commitments are subject to review every five years under the agreement. On July 1, 2017, President Trump announced that the United States would begin a process to withdraw from the Paris Agreement.

 

The Comprehensive Environmental Response, Compensation and Liability Act.  CERCLA (also known as Superfund) requires cleanup of sites from which there has been a release or threatened release of hazardous substances and authorizes the EPA to take any necessary response action at Superfund sites, including ordering potentially responsible parties liable for the release to take or pay for such actions. Potentially responsible parties are broadly defined under CERCLA to include past and present owners and operators of, as well as generators of wastes sent to a site. To our knowledge, we are not currently subject to liability for any Superfund matters. However, we generate certain wastes, including hazardous wastes, and send certain of our wastes to third party waste disposal sites. As a result, there can be no assurance that we will not incur liability under CERCLA in the future.

 

Collom Air Permit. On July 25, 2018, the Center for Biological Diversity and Sierra Club filed a complaint against the CDPHE in opposition to CDPHE’s issuance of an air permit for construction and operation of the Collom pit at the Colowyo Mine. We and Colowyo Coal on August 23, 2018 filed an unopposed motion to intervene and answer to the complaint. The CDPHE on September 4, 2018 filed an answer and defenses to the complaint. On February 14, 2019, the court issued a stay of the case proceedings until May 1, 2019, while CDPHE processes a modified permit. The case management conference that was set for April 1, 2019 was vacated.

 

Mine Reclamation.  The EPA is working with the OSMRE and state mine reclamation regulators to develop a better understanding of mine placement practices for coal ash. The OSMRE may issue a proposed rulemaking

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establishing requirements and standards that apply when coal ash is used during reclamation at surface coal mining operations. However, recent regulatory agendas indicate that OSMRE is not actively pursuing these plans. Until these rules might be promulgated, we cannot determine what, if any, controls we may be required to implement to comply with the regulation.

 

Toxic Substances Control Act/Polychlorinated Biphenyls.  We have limited quantities of PCBs in transmission equipment in the existing system. As oils are changed and systems replaced, PCBs are eliminated and PCB‑free oils are used, reducing regulatory risk. 

 

Endangered Species Act.  Past litigation from environmental groups resulted in the U.S. Fish and Wildlife Service being placed on a schedule to make determinations as to whether or not numerous species should be formally listed as threatened or endangered under the Endangered Species Act. Once listed, a species of animal or plant with threatened or endangered status may complicate, delay, and/or add costs to projects. Of the several hundred species involved in the litigation settlement, we estimate that approximately 30 had the potential to affect our operations. Species of particular concern due to their geographic range and potential impacts to mining and transmission assets are the greater sage‑grouse, the Gunnison sage‑grouse, and the lesser prairie‑chicken. In September 2015, the U.S. Fish and Wildlife Service determined that it was not warranted to list the greater sage-grouse under the Endangered Species Act, in large part due to federal land management agency conservation plans. The Bureau of Land Management and U.S. Forest Service conservation plans from 2015 were reviewed and revised further during 2017 and 2018. We commented in 2017 and 2018 during the Bureau of Land Management’s review process. The Gunnison sage-grouse was addressed in amendments to a local Bureau of Land Management Resource Management Plan and the U.S. Fish and Wildlife Service may issue a Special 4(d) rule for the species in the future. After its listing as a threatened species was vacated, the lesser prairie-chicken underwent another review under the Endangered Species Act. A decision whether or not to list the lesser prairie-chicken was expected in 2018 but was not released. We are monitoring each of these issues as they develop over time. In addition to species-specific actions, the U.S. Fish and Wildlife Service in 2018 proposed three rules aimed at improving various regulatory and compliance processes under the Endangered Species Act. We commented in September 2018 largely in support of these three rules, and continue to monitor.

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ITEM 1A.RISK FACTORS

Our business, financial condition or results of operations could be materially adversely affected by various risks, including those described below.

 

Our ability to raise our Members’ wholesale rates may be limited and we may be subject to rate regulation.

 

Wholesale rate increases for our Members must be approved by a majority of our Board, which is comprised of one representative from each of our 43 Members. According to New Mexico law, we are required to file our Member rates with the NMPRC and the NMPRC only has regulatory authority over our rates in New Mexico in the event three or more of our New Mexico Members file a request to review our rates and the NMPRC finds such request to be qualified. A sufficient number of our New Mexico Members filed for such review in 2012 and 2013. The procedural schedule related to such rate reviews by the NMPRC is currently suspended to allow the parties time for further negotiations towards a global settlement. See ‘‘LEGAL PROCEEDINGS.’’

 

Member challenges to the rates approved by our Board could make it difficult for us to adjust the wholesale rates to our Members as completely or rapidly as necessary in response to changes in our operations or market conditions, which may have an adverse effect on our results of operations and financial condition. The outcome of the rate proceeding in New Mexico, or whether a global settlement will be reached, is difficult to predict at this time. See ‘‘MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Factors Affecting Results—Rates and Regulation.’’

 

Future state laws could be enacted or changes in the interpretation of existing state laws could result in greater oversight of our rates to our Members and may limit our ability to raise our Members’ wholesale rates without review or approval of applicable state commissions.

 

Sustained low natural gas prices could have an adverse effect on the operation of our facilities and our cost of electric service.

 

The wholesale electricity price generally correlates with the wholesale natural gas price in most regions of the United States. Generally, low gas prices correlate to low wholesale electricity prices and thereby could reduce the competitiveness of our coal-fired generating facilities. Sustained low natural gas prices could negatively impact the economics of operating our coal-fired generating facilities, which could cause the temporary or permanent shutdown of individual coal-fired generating facilities, and thereby significantly increase the cost of electric service we provide to our Members and affect their ability to perform their contractual obligations to us. 

 

Renewable Portfolio Standards or other similar laws and regulations may increase our costs of operation and affect the utilization of current generation facilities.

 

Colorado and New Mexico have each enacted an RPS that establishes minimum amounts of electric energy (or an equivalent amount of renewable energy credits) that our Members are required to obtain from renewable sources or that we are required to provide to our Colorado Members from renewable sources.  Colorado law was amended in 2013 to add a separate RPS requirement requiring that at least 20 percent of the energy we provide to our Colorado Members at wholesale come from renewable sources by 2020 and each year thereafter. See “BUSINESS — ENVIRONMENTAL REGULATION — Other Environmental Matters.” We currently provide sufficient energy from renewable sources to meet our Members’ current obligations under the existing RPS requirements.  Neither we nor our Members are subject to an RPS in any other state, but these other states could enact an RPS applicable to us or our Members. Future federal, state, or local laws could be enacted increasing the RPS applicable to our Members or us or other similar laws and regulations could be enacted that limit the amount of electricity generated or sold by us from fossil fuel generating facilities or other facilities that do not qualify under applicable law. 

 

An increased RPS or other similar laws and regulations could have a material impact on our operations, including requiring us to modify the design or operation of existing facilities, increase our operating costs, require us to invest in new generation and transmission, and decrease operation, or close our fossil fuel generating facilities prior to their

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current depreciable lives. In addition, we may be required to purchase power or energy at a cost substantially above the cost we would have incurred to obtain the power or generate the energy from owned facilities.

 

We operate in a capital-intensive industry and therefore debt comprises a majority of our capital structure.

 

As of December 31, 2018, we had total debt and short-term borrowings outstanding of approximately $3.4 billion, of which approximately $2.8 billion was secured under our Master Indenture. We have incurred indebtedness primarily to construct, acquire, or make capital improvements to generation and transmission facilities to supply the current and projected electricity requirements of our Members and to meet our other long-term electricity supply obligations. If demand for electricity from our Members and under our long-term power sales agreements is materially less than projected, we might not generate sufficient revenue to meet the DSR and ECR requirements in our Master Indenture or to service our indebtedness. If this occurs, we may be required to raise our rates, revise our plans for capital expenditures and/or restructure our long-term commitments. These actions may adversely affect our operations, and we may be unable to generate sufficient additional revenue to pay our obligations. Further, failure to meet the ECR requirement in our Master Indenture or failure to service the indebtedness secured by the Master Indenture would result in an event of default under the Master Indenture and other loan agreements. As a consequence, our results of operations, liquidity and financial condition could be adversely affected.

 

We expect we will need to construct or acquire additional generation and transmission facilities to meet our Members’ demands, which may require substantial additional capital expenditures which may increase our long-term debt, or for which we may not be able to obtain financing, and may result in development uncertainties for our business.

 

Our ability to access short-term and long-term capital and our cost of capital could be adversely affected by various factors, including credit ratings and current market conditions, and significant constraints on our access to capital could adversely affect our financial condition and future results of operations.

 

We rely on access to short-term and long-term capital for construction of new facilities and upgrades to our existing facilities and as a significant source of liquidity for capital expenditures not satisfied by cash flow generated from operations. In the years 2019 through 2023, we estimate that we may invest approximately $1.1 billion in new facilities and upgrades to our existing facilities which may require us to take on additional long-term debt.

 

Our access to capital could be adversely affected by various factors and certain market disruptions could constrain, at least temporarily, our ability to maintain sufficient liquidity and to access capital on favorable terms, or at all. These factors and disruptions include:

 

·

market conditions generally;

·

an economic downturn or recession;

·

instability in the financial markets;

·

a tightening of lending and borrowing standards by banks and other credit providers;

·

financial markets view that climate change and emissions of CO2 are a financial risk,

·

the overall health of the energy industry and the generation and transmission cooperative sector;

·

negative events in the energy industry, such as a bankruptcy of an unrelated energy company;

·

war or threat of war; or

·

terrorist attacks or threatened attacks on our facilities or the facilities of unrelated energy companies.

 

If our ability to access capital becomes significantly constrained for any of the reasons stated above or any other reason, our ability to finance ongoing capital expenditures required to maintain existing facilities and to construct future facilities could be limited, our interest costs could increase and our financial condition and results of operations could be adversely affected.

 

We are exposed to market risk, including changes in interest rates and availability of capital in credit markets. The interest rates on these future borrowings could be significantly higher than interest rates on our existing debt. As of December 31, 2018, we had $445 million of debt with variable rates. The rates on this debt could increase.

 

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We maintain the Revolving Credit Agreement which provides backup for our commercial paper program. The facility includes a letter of credit sublimit and a commercial paper backup sublimit, and financial covenants for DSR and ECR consistent with the covenants in our Master Indenture. Failure to maintain these financial covenants or other covenants could preclude us from issuing commercial paper or from issuing letters of credit or borrowing under the Revolving Credit Agreement.

 

Future environmental laws and regulations, including laws and regulations designed to address climate change, air and water quality, coal combustion byproducts and other matters may increase our compliance costs or liabilities in the future.

 

As with most electric utilities, we are subject to extensive federal, state and local environmental requirements that regulate, among other things, air emissions, water discharges and use and the management of hazardous and solid wastes. Compliance with these requirements requires significant expenditures for the installation, maintenance and operation of pollution control equipment, monitoring systems and other equipment or facilities. In 2018, our existing generating facilities generated approximately 58.9 percent of our energy available for sale, a substantial percentage of which is generated by coal-fired facilities.

 

Although the current federal administration is bringing a change in direction for environmental regulations, historically existing environmental regulations have become increasingly stringent. Any additional federal or local environmental restrictions imposed on our operations could result in significant additional compliance costs, including capital expenditures. More stringent standards may require us to modify the design or operation of existing facilities or purchase emission allowances. In addition, more stringent standards or costs could affect generating facilities retirement and replacement decisions and may substantially increase the cost of electricity to our Members. The cost impact of future legislation or regulation will depend upon the specific requirements thereof and cannot be determined at this time, but could be significant. An example of potential regulations to address limitations on CO2 emissions is discussed below.

 

In 2015, the EPA finalized emission limits for CO2 in the Clean Power Plan. On August 31, 2018, the EPA published in the Federal Register a proposed rule intended to replace the Clean Power Plan, commonly referred to as the Affordable Clean Energy rule. However, if the Clean Power Plan is not replaced and upheld by the courts, as finalized, it could have a material impact on our operations, including increased operating costs, additional investment in new generation (natural gas and renewables) and transmission, investment in energy efficiency programs and decreased operation, or closure of coal-fired plants.

 

The Affordable Clean Energy rule would establish guidelines for states to follow in developing limitations (i.e. standards of performance) for CO2 emissions from existing units, based on an EPA determination that the best system of emission reduction is heat rate improvement. While the Affordable Clean Energy rule establishes that requirements be achievable based on adequately demonstrated technology, implementation of the rule will be at the state level, and it is too early to know how each state in which we operate will administer the rule. If a state implements a very strict interpretation of the rule, it may have a material impact on our operations.

 

Litigation relating to environmental issues, including claims of property damage or personal injury caused by greenhouse gas emissions, has increased generally throughout the United States. Likewise, actions by private citizen groups to enforce environmental laws and regulations are becoming increasingly prevalent.

 

There can be no assurance that we will always be in compliance with all environmental requirements. Failure to comply with existing and future requirements, even if this failure is caused by factors beyond our control, could result in civil and criminal penalties and could cause the complete temporary or permanent shutdown of individual generating units not in compliance with these regulations.

 

Our financial condition is largely dependent upon our Members.

 

Our financial condition is largely dependent upon our Members satisfying their obligations under their wholesale electric service contracts with us. In 2018,  96.5 percent of our revenues from electric sales were from our Members. We do not control the operations of our Members, and their financial condition is not tied to our results of

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operations. Accordingly, we are exposed to the risk that one or more of our Members could default in the performance of their obligations to us under their wholesale electric service contract. A default could result from financial difficulties of one or more Members or because of intentional actions by our Members. Our results of operations and financial condition could be adversely affected if a significant portion of our Members default on their obligations to us.

 

Pursuant to our Bylaws, a Member may withdraw from membership in us upon compliance with such equitable terms and conditions as our Board may prescribe provided, however, that no Member shall be permitted to withdraw until it has met all its contractual obligations to us, including all obligations under its wholesale electric service contract with us. In 2016, KCEC withdrew from membership in us and paid us an early termination fee. DMEA has requested an exit cost calculation from us and we have provided to DMEA a preliminary buyout number. DMEA disputes the preliminary buyout number provided to DMEA by us and filed a complaint with the COPUC in December 2018 alleging the COPUC has jurisdiction over the equitable terms and conditions as our Board may prescribe for withdrawal. See “LEGAL PROCEEDINGS.” If the COPUC or any other state commission or regulatory body asserts it has jurisdiction over the terms and conditions for a Member’s withdrawal from us and determines the terms and conditions for DMEA or another Member to withdraw that are less than the monetary value as our Board may proscribe, rates to our Members may increase, our financial condition and results of operations could be adversely affected, and we may be required to prepay certain of our long-term debt. In addition, if we underestimate the monetary value of a Member’s obligation or a significant number of our Members withdraw, our rates to our Members may increase, our financial condition and results of operations could be adversely affected, and we may be required to prepay certain of our long-term debt.

 

Changes in power generation energy sources could reduce demand for our electric services.

 

Our business model is to provide our Members with a reliable, cost‑based supply of electricity. Significant changes are taking place in the electric industry related to self‑generation and power generation energy sources such as fuel cells, batteries, micro turbines, wind turbines and solar cells. Adoption of these generation energy sources may continue to increase because of technological advancements, government subsidies, and a perception that generating electricity through these energy sources is more environmentally friendly than generating electricity with fossil fuels. Increased adoption of these energy sources could reduce electricity demand and the pool of customers from whom fixed costs are recovered or could cause the temporary or permanent shutdown of individual generating units, resulting in higher rates to our Members. Increased self‑generation and the related use of net energy metering, which allows our Members’ self‑generating customers to receive bill credits for surplus power, could reduce demand for electricity from our Members. If these technologies were to develop sufficient economies of scale and we were unable to adjust our prices to reflect reduced electricity demand and increased self‑generation and net energy metering, the competitiveness of our facilities, our financial condition and results of operations could be adversely affected.

 

Increased competition could reduce demand for our electric sales.

 

The electric utility industry has experienced increasing wholesale competition, enabled by deregulation and revisions to existing regulatory policies, competing energy suppliers, new technology, and other factors. The Energy Policy Act of 1992 amended the FPA to allow for increased competition among wholesale electricity suppliers and increased access to transmission services by such suppliers. On the retail side, states in which our Members’ service territories are located do not have retail competition legislation. However, these states could enact retail competition legislation which could reduce our electricity demand from our Members and the pool from which we recover fixed costs, resulting in higher rates to our Members. In addition, federal legislation could mandate retail choice in every state.

 

We and our Members are subject to regulations issued by FERC pursuant to PURPA with respect to matters involving the purchase of electricity from, and the sale of electricity to, qualifying facilities and co‑generators. In June 2015, FERC clarified that the 5 percent limitation in our wholesale electric service contracts with our Members related to distributed or renewable generation owned or controlled by our Members did not supersede PURPA and the requirement of our Members to purchase power from qualifying facilities. An increase in the number and/or size of qualifying facilities selling electricity to our Members could reduce our electricity demand from our Members and the pool from which we recover fixed costs, resulting in higher rates to our Members and reduced access to the capital markets.

 

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A number of other significant factors have affected electric utility operations, including the availability and cost of fuel for electric energy generation; the use of alternative fuel sources for space and water heating and household appliances; fluctuating rates of load growth; compliance with environmental and other governmental regulations; licensing and other factors affecting the construction, operation and cost of new and existing facilities; and the effects of conservation, energy management, and other governmental regulations on electric energy use. All of these factors present an increasing challenge to companies in the electric utility industry, including our Members and us, to reduce costs, increase efficiency and innovation, and improve resource management.

 

We may face competition as a result of the factors described above, including competition from qualifying facilities, other utilities, fuel sources or as a result of technological innovations. Technological innovations may include methods or products that allow consumers to by‑pass the electric supplier, to switch fuels or to reduce consumption. These innovations may include, but are not limited to, demand response, distributed generation, energy storage and microgrids. Competition from other utilities may consist of competition from other electric companies, annexations by municipalities, and competition for the sale of excess power to non-members on both a short-term and long-term basis. If competition increases, rates to our Members may increase or our financial condition and results of operations could be adversely affected.

 

Our Members have a substantial number of industrial and large commercial customers who could decrease operations or elect to self-generate in the future.

 

Based on the most recent information available to us, which is 2017 data, industrial and large commercial customers account for approximately 40 percent of our Members’ energy sales. A large percentage of these sales are in energy production, extraction and transportation. The 15 largest customers of our Members, a substantial percentage of which are in energy production, extraction and transportation, total approximately 18.6 percent of the aggregate retail electric energy sales of our Members, based on the same 2017 data. Outages at facilities of these large customers could reduce demand from and energy sales to our Members. A significant downturn in the economy or sustained low natural gas prices, demand for increased renewable energy, or other changes in business conditions could affect this sector of the energy industry and sales could decrease in the future should these industrial and large commercial customers decide to decrease their operations accordingly or elect to self-generate.

 

We may not be able to obtain an adequate supply of fuel which could limit our ability to operate our facilities.

 

We obtain our fuel supplies, including coal, natural gas and oil, from a number of different suppliers, including mines in which we have ownership interests. Any disruptions in our fuel supplies, including disruptions due to weather, labor relations, permitting, regulatory matters, and environmental regulations, or other factors affecting our coal mines or fuel suppliers, could result in us having insufficient levels of fuel supplies. For example, rail transportation bottlenecks have from time to time caused transportation companies to be unable to perform their contractual obligations to deliver coal on a timely basis and have resulted in lower than normal coal inventories at certain of our generating facilities. Similar inventory shortages could occur in the future due to any of the disruptions described above. In addition, if challenges to the permit for the Collom pit at the Colowyo Mine affect the construction and operation of the Collom pit, it may affect our inventory of fuel supplies. Natural gas and oil supplies can also be subject to disruption due to natural disasters and similar events. Any failure to maintain an adequate inventory of fuel supplies could require us to operate other generating facilities at higher cost or pay significantly higher prices to obtain electric power from other sources, which would have an adverse effect on our results of operations.

 

We must make long‑term decisions involving substantial capital expenditures based on current projections of future conditions.

 

Our decisions to meet our Members’ load demands by construction of new generation and transmission facilities, by entering into long‑term power purchase agreements, or by relying on short‑term power purchase markets are based on long‑term forecasts. We rely on our forecasts to predict factors affecting our Members’ load demands such as economic conditions, population increases and actions by others in the development of generation and transmission facilities. Even though forecasts are less reliable the farther into the future they extend, we must make decisions based on

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forecasts that extend decades into the future due to the long lead‑time necessary to develop and construct new generation and transmission facilities and the long‑term expected useful life of those facilities.

 

Our forecasts and actual events may vary significantly, and, as a result, we may not develop the appropriate number or type of generating facilities or rely on technology that becomes less competitive or install transmission facilities in areas where they are not needed. If we over‑estimate the growth in our Members’ demand, there is no assurance that the price of surplus power or energy from surplus resources would be economical or could be sold without a loss. If we underestimate the growth in our Members’ demand, we may be required to purchase power or energy at a cost substantially above the cost we would have incurred to obtain the power or generate the energy from owned facilities.

 

We may experience transmission constraints or limitations to transmission access, and our ability to construct, and the cost of, additional transmission is uncertain.

 

We currently experience periodic constraints on our transmission system and those of other utilities used to transmit energy from our remote generators to loads due to periodic maintenance activities, equipment failures and other system conditions. We manage these constraints using alternative generation dispatch and energy purchasing patterns. The long-term solution for reducing transmission constraints can include purchasing additional wheeling service from other utilities, or construction of additional transmission lines which would require significant capital expenditures.

 

The demand for access to existing transmission lines may make it increasingly difficult in the future for us to acquire transmission capacity rights without constructing new transmission facilities. In most cases, construction of transmission lines presents numerous challenges. Environmental and state and local permitting processes may result in significant inefficiencies and delays in construction. These issues are unavoidable and are addressed through long‑term planning. We typically begin planning new transmission at least 10 years in advance of the need and voluntarily participate in regional and interregional transmission planning and cost allocation discussions with neighboring transmission providers. In the event that we are unable to complete construction of planned transmission expansion, we must rely on purchases of market priced electric power, which could put increased pressure on electric rates.

 

If we are unable to protect our information systems against service interruption, misappropriation of data or breaches of security, our operations could be disrupted and our financial condition could be adversely affected.

 

We operate in a highly regulated industry that requires the continued operation of advanced information technology systems and network infrastructure. We rely on networks, information systems and other technology, including the Internet and third‑party hosted servers, to support a variety of business processes and activities. We use information systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. Our generation and transmission assets and information technology systems, or those of our co‑owned plants, could be directly or indirectly affected by deliberate or unintentional cyber incidents. Our industry has begun to see an increased volume and sophistication of cyber incidents. These incidents may be caused by failures during routine operations such as system upgrades or user errors, as well as network or hardware failures, malicious or disruptive software, computer hackers, rogue employees or contractors, cyber‑attacks by criminal groups or activist organizations, geopolitical events, natural disasters, failures or impairments of telecommunications networks, or other catastrophic events. In addition, such incidents could result in unauthorized disclosure of material confidential information. While there have been immaterial incidents of phishing and attempted financial fraud across our system, there has been no material impact on business or operations from these attacks. However, we cannot guarantee that security efforts will prevent breaches, operational incidents, or other breakdowns of information technology systems and network infrastructure and cannot provide any assurance that such incidents will not have a material adverse effect in the future.

 

In addition, in the ordinary course of business, we collect and retain sensitive information, including personally identifiable information about employees, directors, and other third parties, and other confidential information. In some cases, administration of certain functions may be outsourced to third-party service providers that could also be targets of cyber attacks.

 

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If our technology systems are breached or otherwise fail, we may be unable to fulfill critical business functions, including the operation of our generation and transmission assets and our ability to effectively maintain certain internal controls over financial reporting. Further, our generation assets rely on an integrated transmission system, a disruption of which could negatively impact our ability to deliver power to our Members. A major cyber incident could result in significant business disruption, compromised or improper disclosure of data, and expense to repair security breaches or system damage and could lead to litigation, regulatory action, including penalties or fines, and an adverse effect on our financial condition, results of operations, and reputation. Moreover, the amount and scope of insurance maintained against losses resulting from any such cyber incident may not be sufficient to cover losses or otherwise adequately compensate for any disruptions to business that could result. In addition, as cybercriminals become more sophisticated, the cost of proactive defensive measures may increase. We also may have future compliance obligations related to new mandatory and enforceable NERC reliability standards addressing the impacts of geomagnetic disturbances and other physical security risks to the reliable operation of the bulk power system.

 

We are exposed to cost uncertainty in connection with our construction projects at existing generating facilities, new and existing transmission facilities, expansion of coal mines, and in connection with decommissioning of certain existing generating facilities.

 

Our existing facilities require ongoing capital expenditures in order to maintain efficient and reliable operations. Many of our generating facilities were constructed over 30 years ago and, as a result, may require significant capital expenditures to maintain efficiency and reliability and to comply with changing environmental requirements.

 

The completion of construction projects is subject to substantial risks, including delays or cost overruns due to:

·

shortages and inconsistent quality of equipment, materials and labor;

·

permits, approvals and other regulatory matters;

·

unforeseen engineering problems;

·

environmental and geological conditions;

·

environmental litigation;

·

delays or increased costs to interconnect our facilities with transmission grids;

·

unanticipated increases in cost of materials and labor; and

·

performance by engineering, construction or procurement contractors.

 

The decommissioning of certain of our existing generating facilities before the end of their useful life is subject to substantial risks, including potential requirements to recognize a material impairment of our assets and incur added expenses relating to accelerated depreciation and amortization, decommissioning, reclamation and cancellation of long-term contracts for such generating plants and facilities. Closure of any of such generating facilities may force us to incur higher costs for replacement capacity and energy. The decommissioning costs may exceed our estimate, which could negatively impact results of operations and liquidity.

 

All of these risks could have the effect of increasing the cost of electric service we provide to our Members and, as a result, could affect their ability to perform their contractual obligations to us.

 

We could be adversely affected if we or third parties are unable to successfully operate our generating facilities.

 

Our performance depends on the successful operation of our electric generating facilities. Operating generating facilities involves many risks, including, among others, the following:

·

operator error and breakdown or failure of equipment or processes;

·

operating limitations that may be imposed by environmental or other regulatory requirements;

·

labor disputes;

·

problems resulting from an aging workforce and retirements;

·

ability to maintain a knowledgeable workforce;

·

availability and cost of fuel;

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·

fuel supply interruptions, including transportation interruptions;

·

availability and cost of water;

·

water supply interruptions;

·

catastrophic events such as fires, earthquakes, explosions, floods or other similar occurrences; and

·

compliance with mandatory reliability standards when such standards are adopted and as subsequently revised.

 

Unforeseen outages at our generating facilities could lead to higher costs because we may be required to purchase power in volatile electric power markets. A decrease or elimination of revenues from electric power produced by our generating facilities or an increase in the cost of operating the facilities could adversely affect our results of operation.

 

We may be held liable for the actions or omissions of our Members, despite the fact that we and our Members are separate legal entities and we do not own, operate, control or have the right to control our Members.

 

Litigation seeking to impose liability on us for the actions of our Members has increased. The plaintiffs in these actions have claimed that we are jointly liable for the actions of our Members, including under theories of partnership, joint venture, joint/common enterprise, or alter ego. The plaintiffs in these actions have also claimed that we owe them independent duties regarding our Members. We strongly dispute these claims as inconsistent with the facts and law. Although a jury determined in one case that we and one of our Members do not operate as a joint venture or joint enterprise, the jury determined we violated an independent duty owed to the plaintiffs and were 20 percent at fault as a result of the Member’s independent actions. There can be no assurance that a court or jury will determine in the future that we are not severally liable or jointly liable for the actions of our Members. Our results of operations and financial condition could be adversely affected if courts or juries determine we are severally or jointly liable for the actions of our Members.

 

Losses from wildfires could adversely affect our financial condition, future results of operations, and cash flow.

 

We have ownership or capacity interests in approximately 5,665 miles of high‑voltage transmission lines include transmission lines that cross through forest areas and grasslands.  Certain of our transmission facilities are located on federal land and certain permits with the federal government impose strict liability on us up to a maximum cap related to our transmission facilities. If a wildfire involving our transmission facilities were to occur, we could be liable for property damage and other costs, without in certain cases having been found negligent, which liability could be substantial and in excess of our liability insurance.  Any such liability could materially affect us and our financial condition, future results of operations, and cash flow.

 

We rely on purchases of electric power from other power suppliers and long‑term contracts to purchase and transport fuels and to sell electricity we generate, which exposes us to market and counterparty risks.

 

Our electric power supply strategy relies, in part, on purchases of electric power from other power suppliers. In 2018, purchased power provided 41.1 percent of our energy requirements. These purchases consist of a combination of purchases under long‑term contracts and short-term market purchases of electric power. We also rely on long‑term contracts with third‑parties to (a) manage our supply and transportation of fuel for our generating facilities, and (b) sell electricity we generate to non‑member utilities. We are exposed to the risk that counterparties to these long‑term contracts will breach their obligations to us or claim that we are in breach. If this occurs, we may be forced to enter into alternative contractual arrangements or enter into short-term market transactions at then‑current market prices. Purchasing electric power in the market exposes us, and consequently our Members, to market price risk because electric power prices can fluctuate substantially over short periods of time. The terms of these new arrangements may be less favorable than the terms of our current agreements, which could have an adverse effect on our results of operations.

 

When we enter into long‑term electric power purchase contracts, we rely on models based on our judgments and assumptions of factors such as future demand for electric power, future market prices of electric power and the future price of commodities used to generate electricity. These judgments and assumptions may prove to be incorrect. As a result, we may be obligated to purchase electric power under long‑term agreements at a price which is higher than we

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could have obtained in alternative short‑term arrangements. Conversely, our reliance on short-term market purchases exposes us to increases in electric power prices.

 

Our long‑term power purchase contracts include contracts with WAPA and Basin, consisting of 15.3 percent and 14.5 percent, respectively, of our Member sales in 2018. We experience favorable pricing terms under our WAPA contracts under federal laws that give preference to federal hydropower production to certain customers, including cooperatives. If the federal laws under which we receive favorable pricing were to be amended or eliminated or if WAPA were to no longer provide us with favorable pricing for any other reason, we would have to pay significantly higher prices to obtain this electric power, which could have an adverse effect on our results of operations. The prices we pay for power under the WAPA and Basin contracts are determined by WAPA and Basin, respectively, and are subject to change in accordance with the terms of the contracts. If we would have to pay significantly higher prices under these contracts, it could have an adverse effect on our results of operations.

 

A portion of our workforce is represented by unions. Failure to successfully negotiate collective bargaining agreements, or strikes or work stoppages, could cause our business to suffer.

 

Many of our employees are covered by collective bargaining agreements, and other employees may seek to be covered by collective bargaining agreements. Strikes or work stoppages or other business interruptions could occur if we are unable to renew these agreements on satisfactory terms or enter into new agreements on satisfactory terms or if we are unable to otherwise manage changes in, or that affect, our workforce, which could adversely impact our business, financial condition or results of operations. The terms and conditions of existing, renegotiated or new collective bargaining agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency or to adapt to changing business needs or strategy.

 

We may be subject to physical attacks.

 

As operators of energy infrastructure, we may face a heightened risk of physical attacks on our electric systems. Our generation and transmission assets and systems are geographically dispersed and are often in rural or sparsely populated areas which make them especially difficult to adequately detect, defend from, and respond to such attacks.

 

If, despite our security measures, a significant physical attack occurred, we could have our operations disrupted, property damaged, experience loss of revenues, response costs, and other financial loss; and be subject to increased regulation, litigation, and damage to our reputation, any of which could have a negative impact on our business and results of operations.

 

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

32


 

ITEM 2.PROPERTIES

Generating Facilities

We own, lease, have undivided percentage interests in, or have tolling arrangements, which are accounted for as leases, with respect to, various generating facilities which are identified in the table below. All of our interests in these facilities or agreements, as applicable, are subject to the lien of our Master Indenture.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

% Interest

    

 

    

Unit

    

Our

    

 

 

 

 

 

 

Owned or

 

Fuel

 

Rating

 

Share

 

Year

 

Name

 

Location

 

Leased

 

Used

 

(MW)*

 

(MW)

 

Installed

 

Coal

 

 

 

 

 

 

 

 

 

 

 

 

 

Craig Generating Station Unit 1

 

Colorado

 

24.0

 

Coal

 

427

 

102

 

1980

 

Craig Generating Station Unit 2

 

Colorado

 

24.0

 

Coal

 

410

 

98

 

1979

 

Craig Generating Station Unit 3

 

Colorado

 

100.0

 

Coal

 

448

 

448

 

1984

 

Escalante Generating Station

 

New Mexico

 

100.0

 

Coal

 

253

 

253

 

1984

 

Laramie River Generating Station Unit 1

 

Wyoming

 

27.1

 

Coal

 

570

 

0

 

1980

 

Laramie River Generating Station Unit 2

 

Wyoming

 

27.1

 

Coal

 

570

 

232

 

1981

 

Laramie River Generating Station Unit 3

 

Wyoming

 

27.1

 

Coal

 

570

 

232

 

1982

 

Nucla Generating Station

 

Colorado

 

100.0

 

Coal

 

100

 

100

 

1987

 

Springerville Generating Station Unit 3

 

Arizona

 

100.0

 

Coal

 

419

 

419

 

2006

 

Gas/Oil

 

 

 

 

 

 

 

 

 

 

 

 

 

Burlington Generating Station

 

Colorado

 

100.0

 

Oil

 

110

 

110

 

1977

 

J.M. Shafer Generating Station

 

Colorado

 

100.0

 

Gas

 

272

 

272

 

1994

 

Knutson Generating Station

 

Colorado

 

100.0

 

Gas/Oil

 

140

 

140

 

2002

 

Limon Generating Station

 

Colorado

 

100.0

 

Gas/Oil

 

140

 

140

 

2002

 

Pyramid Generating Station

 

New Mexico

 

100.0

 

Gas/Oil

 

160

 

160

 

2003

 

Rifle Generating Station

 

Colorado

 

100.0

 

Gas

 

81

 

81

 

1986

 

AltaGas Brush Energy Inc.

 

Colorado

 

100.0

 

Gas

 

70

 

70

 

1994

 


*The Unit Ratings for each generating facility are subject to fluctuations to account for various operating conditions and environmental mitigation equipment requirements.

Craig Generating Station.  Craig Station is a three‑unit, 1,285 MW coal‑fired electric generating facility located near Craig, Colorado. Craig Station Units 1 and 2 and related common facilities are known as the Yampa Project and jointly owned as tenants in common by us and four other regional utilities pursuant to a participation agreement. We own a 24 percent interest in Craig Station Units 1 and 2, which each have capacity of 427 MWs and 410 MWs, respectively, and a 100 percent interest in Craig Station Unit 3, which has a capacity of 448 MWs. We are the operating agent for all three units and are responsible for the daily management, administration and maintenance of the facility. The costs associated with operating Craig Station Units 1 and 2 are divided on a pro‑rata basis among all the participants. Our total share of Craig Station’s capacity is 648 MWs. On September 1, 2016, we announced that the owners of Craig Station Unit 1 reached an agreement whereby Unit 1 is intended to be retired by December 31, 2025.

Escalante Generating Station.  Escalante Station is a 253 MW coal‑fired electric generating facility located near Prewitt, New Mexico. Escalante Station is wholly owned and operated by us.

Laramie River Generating Station.  Laramie River Generating Station is a three-unit, 1,710 MW coal‑fired electric generating facility located near Wheatland, Wyoming and operated by Basin. Laramie River Generating Station and related transmission lines are known as the MBPP, and jointly owned as tenants in common by us and four other regional utilities pursuant to a participation agreement. Certain costs associated with operating the facility are divided on a pro‑rata basis among the participants, while other costs are shared in proportion to the generation scheduled and energy produced for each participant. Laramie River Generating Station Unit 1 is connected to the Eastern Interconnection, while Units 2 and 3 are connected to the Western Interconnection. Effective July 1, 2018, our ownership share in MBPP

33


 

increased by 3 percent to 27.1 percent due to our acquisition of Heartland Consumers Power District’s 3 percent ownership share in MBPP. Our share of Laramie River Generating Station’s total capacity is 464 MWs, which we receive out of Units 2 and 3.

Nucla Generating Station.  Nucla Generating Station is a 100 MW coal‑fired electric generating facility located near Nucla, Colorado. Nucla Generating Station is wholly owned and operated by us. On September 1, 2016, we announced as part of an agreement that we intend to retire Nucla Generating Station by December 31, 2022.

Springerville Generating Station Unit 3.  Springerville Unit 3, located in east‑central Arizona, is a 419 MW unit that is part of a four-unit, 1,578 MW coal‑fired electric generating facility operated by TEP. Under contractual agreements, we, as the lessee of Springerville Unit 3, are taking 419 MWs of capacity from the unit and selling 100 MWs of such capacity to Salt River Project and 100 MWs of such capacity to PNM. We own a 51 percent equity interest (including the 1 percent general partner equity interest) in Springerville Partnership, which owns Springerville Unit 3. Our leasehold interest, as the lessee of Springerville Unit 3, is subject to the lien of our Master Indenture, but Springerville Unit 3 is not subject to the lien of our Master Indenture. Springerville Unit 3 is subject to a mortgage and lien to secure the Springerville certificates.

Burlington Generating Station.  Burlington Generating Station consists of two 55 MW simple-cycle combustion turbines that operate on fuel oil and is located in Burlington, Colorado. The units are primarily operated during periods of peak demand. Burlington Generating Station is wholly owned and operated by us.

J.M. Shafer Generating Station.  J.M. Shafer Generating Station is a 272 MW, natural gas fired, combined-cycle generating facility located near Fort Lupton, Colorado, which is primarily operated to provide intermediate load generating capacity. J.M. Shafer Generating Station is owned by our wholly‑owned subsidiary TCP. 122 MWs are sold to PSCO under a tolling agreement through June 2019 and we utilize the remaining 150 MWs of output. Our interest in J.M. Shafer Generating Station and the PSCO tolling agreement are not subject to the lien of our Master Indenture.

Knutson Generating Station.  Knutson Generating Station consists of two 70 MW simple-cycle combustion turbines that can operate on either natural gas or fuel oil and is located near Brighton, Colorado. The units are primarily operated during periods of peak demand. Knutson Generating Station is wholly owned and operated by us.

Limon Generating Station.  Limon Generating Station consists of two 70 MW simple-cycle combustion turbines that can operate on either natural gas or fuel oil and is located near Limon, Colorado. The units are primarily operated during periods of peak demand. Limon Generating Station is wholly owned and operated by us.

Pyramid Generating Station.  Pyramid Generating Station consists of four 40 MW simple-cycle combustion turbines that can operate on either natural gas or fuel oil and is located near Lordsburg, New Mexico. The units are primarily operated during periods of peak demand. Pyramid Generating Station is wholly owned and operated by us.

Rifle Generating Station.  Rifle Generating Station is an 81 MW, natural gas fired, combined-cycle generating facility located near Rifle, Colorado, which is primarily operated during periods of peak demand. Rifle Generating Station is wholly owned and operated by us.

AltaGas Brush Energy.  We have a gas tolling arrangement through December 31, 2019 with AltaGas Brush Energy Inc. to provide intermediate load generating capacity of 70 MWs. Under this tolling arrangement, we are entitled to receive the energy output of the source facility at our call, and we supply the natural gas to operate the source facility. The source facility is a combined-cycle facility located near Brush, Colorado. We do not anticipate renewing this gas tolling arrangement with AltaGas Brush Energy Inc. Our tolling arrangement is subject to the lien of our Master Indenture, but the source facility is not subject to the lien of our Master Indenture.

34


 

Transmission

As of December 31, 2018, we own, lease, or have undivided percentage interest in transmission lines as described in the following table (estimated miles based on Geographic Information System):

 

 

 

 

Voltage (kV)

 

 

Miles

69

 

 

56

115

 

 

3,237

138

 

 

173

230

 

 

1,117

345

 

 

1,082

Total

 

 

5,665

We are an ownership participant in the MBPP (Laramie River Generating Station) and Yampa Project (Craig Station Units 1 and 2) transmission systems and have ownership interests or capacity rights in several other transmission line participation projects. Transmission investment also includes ownership or major equipment ownership in approximately 409 substations and switchyards. All of our interests in these facilities or agreements, as applicable, are subject to the lien of our Master Indenture.

Coal Mines

We, through either our subsidiaries or our membership in third parties, have an ownership interest in the coal mines identified in the table below.

 

 

 

 

 

 

 

 

Mine

 

Location

 

Colowyo Coal Mine(1)

 

Colorado

 

New Horizon Mine(2)

 

Colorado

 

Trapper Mine(3)

 

Colorado

 

Dry Fork Mine(4)

 

Wyoming

 

Fort Union Mine(5)

 

Wyoming

 


(1)

Colowyo Coal Mine is owned by Colowyo Coal, our wholly owned subsidiary.

(2)

New Horizon Mine is owned by Elk Ridge, our wholly owned subsidiary. New Horizon Mine is in mine reclamation and no longer produces coal.

(3)

Trapper Mine is owned by Trapper Mining. We, along with certain participants, in the Yampa Project, own Trapper Mining. We have a 26.57 percent cooperative member interest in Trapper Mining.

(4)

Dry Fork Mine is owned by WFW. 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 27.13 percent undivided interest) own the remaining 25 percent of class BB shares of WFW.

(5)

The land and rights to mine the Fort Union Mine are owned by us and Basin.

ITEM 3.LEGAL PROCEEDINGS

DMEA.  Pursuant to our Bylaws, a Member may only withdraw from membership in us upon compliance with such equitable terms and conditions as our Board may prescribe provided, however, that no Member shall be permitted to withdraw until it has met all its contractual obligations to us, including all obligations under its wholesale electric service contract with us. DMEA, which constituted approximately 3.2 percent of our revenue from Member sales in 2018, has requested an exit cost calculation from us and we have provided to DMEA a preliminary buyout number for withdrawal. On December 6, 2018, DMEA filed a formal complaint with the COPUC alleging the COPUC has jurisdiction over the equitable terms and conditions as our Board may prescribe for withdrawal and that the preliminary buyout number provided to DMEA was unjust, unreasonable, and discriminatory. On January 15, 2019, we filed a motion to dismiss with the COPUC because the COPUC does not have jurisdiction over the complaint. Our motion to

35


 

dismiss states that even if the COPUC had rate jurisdiction over us (which we are not conceding), it would not have jurisdiction over us for contractual matters related to our Bylaws, which the entire complaint is about. A number of parties have intervened or petitioned to participate as amici, including thirty‑eight of our Members, with two in support of DMEA, one taking no position, and thirty‑five in support of our position, and various environmental groups have petitioned in support of DMEA. On February 1, 2019, the COPUC entered an interim decision denying all motions to intervene and granting the parties amicus curiae status, with the exception of the Colorado Energy Office which was allowed to intervene. At its open meeting on February 14, 2019, the COPUC stated it had jurisdiction over the complaint and denied our motion to dismiss. On February 19, 2019, the COPUC issued a written interim decision setting the matter for a 5-day evidentiary hearing beginning on June 17, 2019. We are still waiting for the written decision from the COPUC regarding the denial of our motion to dismiss.

On January 15, 2019, we filed a Complaint for Declaratory Judgement in the Adams County District Court where we asked the court to declare that our Board has the discretion to exercise its business judgment in determining whether to set equitable terms and conditions for Member withdrawal and what those terms and conditions will be.  On February 22, 2019, the COPUC filed a motion to intervene in the Adams County District Court proceeding and a motion to dismiss the proceeding asserting that the Adams County District Court does not have subject matter jurisdiction. On February 25, 2019, the Adams County District Court granted the COPUC’s motion to intervene. On February 25, 2019, DMEA filed a motion to dismiss the Adams County District Court proceeding asserting that the Adams County District Court does not have subject matter jurisdiction.

FERC Petition.    On February 17, 2016, we filed a Petition for Declaratory Order with FERC seeking a declaratory order from FERC finding that the fixed cost recovery mechanism in our revised Board policy is consistent with the provisions of PURPA and the implementing regulations of FERC. The revised Board policy provides for recovery of the unrecovered fixed costs directly from a Member as a result of that Member purchasing power from a “qualifying facility” in an amount that causes it to exceed the 5 percent limitation on that Member’s self-supply of power pursuant to its wholesale electric service contract, rather than allocating the costs among all of our Members. The fixed cost recovery is calculated based on the difference between our wholesale rate to our Members and our avoided costs. Various individuals and entities filed comments and four entities filed motions to intervene, including our Member, DMEA. On June 16, 2016, FERC denied our Petition for Declaratory Order related to the fixed cost recovery mechanism in our revised Board policy. On July 18, 2016, we filed a Request for Rehearing with FERC regarding FERC’s June 16 order. In addition, five other generation and transmission cooperatives filed a Request for Rehearing with FERC. We cannot predict the outcome of our July 18 request for rehearing filed with FERC.

NMPRC Proceeding.  On October 19, 2012, we gave notice, as required by New Mexico law, to the NMPRC of our A‑37 wholesale rate which was scheduled to become effective on January 1, 2013. The rate would have increased revenue collected from all of our Members. In November 2012, three of our Members located in New Mexico filed protests of our rates with the NMPRC. On December 20, 2012, the NMPRC suspended the rate filing in New Mexico. On January 25, 2013, we filed a Complaint for Declaratory and Injunctive Relief in the Federal District Court in New Mexico asking the Court to declare the actions of the NMPRC to be in violation of the Commerce Clause of the United States Constitution. On September 10, 2013, we gave notice, as required by New Mexico law, to the NMPRC of our A‑38 wholesale rate which was scheduled to become effective on January 1, 2014. Four Members filed protests with the NMPRC challenging the A-38 rate. The A‑38 rate modified the rate design but did not increase the general revenue requirement. On December 11, 2013, the NMPRC suspended the A‑38 rate filing. In August 2014, we and the New Mexico Members executed a preliminary mediation agreement providing for a temporary rate rider through no later than December 31, 2015, and a suspension of the procedural schedule related to the rate protest to allow the parties time to proceed with more extensive discussions on a global settlement. In October 2015, the Federal District Court in New Mexico temporarily stayed the federal proceeding to allow the parties’ time to negotiate a global settlement. No initial scheduling conference in the federal proceeding has been scheduled and the parties periodically file status reports with the Court. On December 9, 2015, we and the New Mexico Members filed a joint motion with the NMPRC seeking continuation of the suspension of the procedural schedule related to the rate protests to allow the parties additional time to proceed with further negotiations towards a global settlement. On January 6, 2016, the NMPRC ordered that the procedural schedule related to the rate protests remains suspended until further order of the NMPRC. As part of the global settlement, the parties seek to address the issue of our rate regulation in New Mexico, payment of capital credits, and whether we have the right to collect the amounts uncollected from our New Mexico Members as a result of the

36


 

suspension of prior rate filings. We cannot predict the outcome of this matter or if a global settlement will be reached, although we do not believe this proceeding is likely to have a material adverse effect on our financial condition or our future results of operations or cash flows.

Water Proceedings.  We are involved in a water rights proceeding in the State of New Mexico that could impact the water rights for Escalante Station. It is an adjudication of water rights associated with the Bluewater Toltec Area to determine the past, present and future use of water rights of the Pueblos of Acoma and Laguna. We are also involved in water rights proceedings in the State of Colorado related to Burlington Generating Station and J.M. Shafer Generating Station. We cannot predict the outcome of these matters, although we do not believe these proceedings are likely to have a material adverse effect on our financial condition or our future results of operations. See “BUSINESS — POWER SUPPLY RESOURCES — Water Supply.”

ITEM 4.MINE SAFETY DISCLOSURES

Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S‑K (17 CFR 229.104) is included in Exhibit 95 to this annual report on Form 10‑K.

37


 

PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Not Applicable.

ITEM 6.SELECTED FINANCIAL DATA

The following tables set forth our selected consolidated financial data as of the dates for the years indicated. This consolidated financial data is qualified in its entirety by and should be read in conjunction with the more detailed information and the audited financial statements, including the notes to such financial statements, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the years ended December 31,

 

 

 

2018

 

2017

 

2016

 

2015

 

2014

 

Income Statement Data

    

 

 

    

 

    

 

 

    

 

 

    

 

 

    

 

Operating revenues

 

$

1,320,837

 

$

1,388,593

 

$

1,341,096

 

$

1,335,448

 

$

1,395,091

 

Operating expenses

 

 

(1,159,444)

 

 

(1,204,896)

 

 

(1,194,090)

 

 

(1,157,479)

 

 

(1,213,214)

 

Operating margins

 

 

161,393

 

 

183,697

 

 

147,006

 

 

177,969

 

 

181,877

 

Interest expense

 

 

(153,704)

 

 

(147,608)

 

 

(144,877)

 

 

(142,570)

 

 

(142,357)

 

Net margins attributable to the Association

 

 

42,734

 

 

61,656

 

 

31,748

 

 

53,413

 

 

64,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

 

 

2018

 

2017

 

2016

 

2015

 

2014

 

Balance Sheet Data:

    

 

 

    

 

    

 

 

    

 

 

    

 

 

    

 

Total assets

 

$

5,026,867

 

$

4,893,594

 

$

4,911,291

 

$

4,823,047

 

$

4,654,136

 

Electric plant, in service, less accumulated depreciation

 

 

3,399,752

 

 

3,393,824

 

 

3,321,058

 

 

3,245,786

 

 

3,064,063

 

Construction work in progress

 

 

207,732

 

 

175,567

 

 

212,081

 

 

216,279

 

 

206,097

 

Long-term debt

 

 

3,109,301

 

 

3,120,286

 

 

3,139,705

 

 

3,273,538

 

 

3,145,246

 

Patronage capital equity

 

 

1,015,754

 

 

1,003,020

 

 

961,364

 

 

952,082

 

 

908,669

 

Accumulated other comprehensive income (loss)

 

 

375

 

 

(210)

 

 

(286)

 

 

589

 

 

(828)

 

Noncontrolling interest

 

 

110,169

 

 

111,295

 

 

109,147

 

 

108,757

 

 

109,302

 

Total capitalization

 

$

4,235,599

 

$

4,234,391

 

$

4,209,930

 

$

4,334,966

 

$

4,162,389

 

 

 

 

38


 

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

 

We are a taxable wholesale electric power generation and transmission cooperative operating on a not‑for‑profit basis. We are organized for the purpose of providing electricity to our 43 Members that serve large portions of Colorado, Nebraska, New Mexico and Wyoming. We also sell a portion of our generated electric power to other utilities in our regions pursuant to long‑term contracts and short-term sale arrangements. Our Members provide retail electric service to suburban and rural residences, farms and ranches, cities, towns and communities, as well as large and small businesses and industries. As of December 31, 2018, our Members served approximately 615,000 retail electric meters over a 200,000 square‑mile area. In 2018, we sold 18.2 million MWhs, of which 90.0 percent was to Members. Total revenue from electric sales was $1.3 billion for 2018, of which 97.3 percent was from Member sales.

 

Pursuant to our Bylaws, unless otherwise specified in a written agreement, each Member is required to purchase from us all electric power and energy used by such Member. This requirement in our Bylaws is further specified in a wholesale electric service contract with each Member. Our wholesale electric service contracts with our Members extending through 2050 for 42 Members (which constitute approximately 96.8 percent of our revenue from Member sales in 2018) and extending through 2040 for the remaining Member (DMEA) are substantially similar. These contracts are subject to automatic extension thereafter until either party provides at least a two years’ notice of its intent to terminate. Each contract obligates us to sell and deliver to the Member and obligates the Member to purchase and receive at least 95 percent of its electric power requirements from us. Each Member may elect to provide up to 5 percent of its electric power requirements from distributed or renewable generation owned or controlled by the Member. As of December 31, 2018, 21 Members have enrolled in this program with capacity totaling approximately 139 MWs of which 111 MWs are in operation. In 2018, we estimate that nearly a third of the energy delivered by us and our Members to our Members’ customers came from non-carbon emitting resources.

 

Pursuant to our Bylaws, a Member may only withdraw from membership in us upon compliance with such equitable terms and conditions as our Board may prescribe; provided, however, that no Member shall be permitted to withdraw until it has met all its contractual obligations to us, including all obligations under its wholesale electric service contract with us. From time to time, a Member may request equitable terms and conditions as our Board may prescribe for withdrawal or we may provide for informational purposes to all or a portion of our Members equitable terms and conditions for withdrawal. In addition, from time to time, we may be in discussions with a Member regarding the equitable terms and conditions for withdrawal and their request for withdrawal, including granting a Member permission to explore options for potential alternative supplies of power. However, any such permission is not considered authorization to withdraw and does not change the Member’s requirements and obligation to comply with such equitable terms and conditions as our Board may prescribe. DMEA has requested an exit cost calculation from us and we have provided to DMEA a preliminary buyout number.  DMEA disputes the buyout number provided to DMEA by us and filed a formal complaint with the COPUC in December 2018 alleging the COPUC has jurisdiction over the equitable terms and conditions as our Board may prescribe for withdrawal. On January 15, 2019, we filed a motion to dismiss with the COPUC because the COPUC does not have jurisdiction over the complaint. Our motion to dismiss states that even if the COPUC had rate jurisdiction over us (which we are not conceding), it would not have jurisdiction over us for contractual matters related to our Bylaws, which the entire complaint is about. In addition, we filed a Complaint for Declaratory Judgement in the Adams County District Court on January 15, 2019 where we asked the court to declare that our Board has the discretion to exercise its business judgment in determining whether to set equitable terms and conditions for Member withdrawal and what those terms and conditions will be. At its open meeting on February 14, 2019, the COPUC stated it had jurisdiction over the DMEA complaint and denied our motion to dismiss. The COPUC has set a 5-day evidentiary hearing beginning on June 17, 2019. See “LEGAL PROCEEDINGS.”

 

We provide electric power to our Members at rates established by our Board. Rates to Members are designed to generate revenues sufficient to recover our cost of service and to generate margins sufficient to establish reasonable reserves and to meet or exceed certain financial requirements. We also provide electric power to non‑members at contractual rates under long‑term arrangements and at market prices in short-term sale transactions.

 

39


 

We are a taxable cooperative subject to federal and state taxation. As a taxable cooperative, we are allowed a tax exclusion for margins allocated to our Members as patronage capital.

 

Under the cooperative structure, margins represent the excess of revenues over expenses. Margins not yet distributed to Members in cash constitute patronage capital, a cooperative’s principal source of equity. Patronage capital is held for the account of our Members without interest and is retired when our Board deems it appropriate to do so. Our Master Indenture restricts our ability to retire patronage capital during an Event of Default (as defined in our Master Indenture). We must also satisfy the required ECR after giving effect to such retirement. Additionally, our Board evaluates liquidity goals and equity goals (that are a part of the Board Policy for Financial Goals and Capital Credits) in determining the timing and amount of patronage capital retirement, and if our Board determines that our financial condition will not be impaired, retained patronage capital may be retired. Historically, patronage capital has been retired in order of priority according to the year in which the patronage capital was furnished and credited; however, our Board has discretion on the order of retirement. As of December 31, 2018, patronage capital equity was $1.016 billion.

 

We supply and transmit our Members’ electric power requirements through a portfolio of resources, including generation and transmission facilities, long‑term purchase contracts and short‑term energy purchases. We own, lease, have undivided percentage interests in, have tolling arrangements or long-term purchase contracts with respect to, various generating facilities. Our diverse generation portfolio provides us with maximum available power of 4,519 MWs of which approximately 1,059 MWs comes from renewables. In December 2018, we executed a 100 MW solar-based power purchase agreement for the Spanish Peaks Solar Project that is expected to achieve commercial operation in 2023. In February 2019, we executed a 104 MW wind-based power purchase agreement for the Crossing Trails Wind Farm that is expected to achieve commercial operation in 2020. Upon commercial operation of these two renewable generating facilities, our renewable generation portfolio is expected to increase to 1,263 MWs. We transmit power to our Members through resources that we own, lease or have undivided percentage interests in, or by wheeling power across lines owned by other transmission providers.

 

Critical Accounting Policies

 

The preparation of our financial statements in conformity with GAAP requires that our management make estimates and assumptions that affect the amounts reported in our consolidated financial statements. We base these estimates and assumptions on information available as of the date of the financial statements and they are not necessarily indicative of the results to be expected for the year. We consider the following accounting policies to be critical accounting policies due to the estimation involved or due to the particular significance they have on our consolidated financial statements.

 

Accounting for Rate Regulation.  We are a rate-regulated entity and, as a result, are subject to the accounting requirements of Accounting for Regulated Operations. In accordance with these accounting requirements, some revenues and expenses have been deferred at the discretion of our 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 we expect to recover from 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 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.

 

Leases. The accounting for lease transactions in conformity with GAAP requires management to make various assumptions, including the discount rate, the fair market value of the leased assets and the estimated useful life, in order to determine whether a lease should be classified as operating or capital. We are the lessor under a power sales arrangement that is required to be accounted for as an operating lease because it conveys the right to use our power generating equipment for a stated period of time. The lease revenue from this arrangement is included in other operating revenue on our consolidated statements of operations. We are the lessee under a power purchase arrangement that is required to be accounted for as an operating lease because it conveys to us the right to use power generating equipment for a stated period of time. It is included in lease expense on our consolidated statements of operations.

 

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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 and 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. Asset retirement obligations are included in deferred credits and other liabilities.

 

Factors Affecting Results

 

Master Indenture

 

Our Master Indenture requires us to establish rates annually that are reasonably expected to achieve a DSR of at least 1.10 on an annual basis and permits us to incur additional secured obligations as long as after giving effect to the additional secured obligation, we will continue to meet the DSR requirement on both a historic and pro forma basis. Our DSR is calculated by dividing (x) our Net Margins Available for Debt Service (as defined in our Master Indenture), which is equal to our net margins for a period plus amounts deducted for the period to pay or make provision for interest on debt (including capitalized interest other than Allowance for Funds Used During Construction), lease expense, income tax expense, amortization of debt discount or premium, and depreciation and certain other non-cash items by (y) our Annual Debt Service Requirement (as defined in our Master Indenture), which is generally equal to the principal of, premium, if any, and interest (whether capitalized or expensed) on all of our debt and lease payments which become due in the applicable fiscal year or 12‑month period at maturity or stated maturity, subject to special calculation rules applicable to specific types of debt (such as balloon debt). For purposes of the DSR calculation, we are permitted to exclude from the Annual Debt Service Requirement principal and interest on debt if the debt is paid or to be paid from defeasance obligations which have been irrevocably deposited or set aside in trust for payment of such debt. Our failure to achieve the required DSR is not a default under the Master Indenture as long as a plan is timely adopted and being implemented and no payment default has occurred. However, subject to certain limited exceptions, we cannot issue additional secured obligations under the Master Indenture unless the DSR for the prior fiscal year (or period of prior 12 consecutive months) is at least 1.10 and the estimated DSR for the current and next two years (or, if applicable, two years following the anticipated commercial operation date of the assets being financed) is at least 1.10. Our DSR for the twelve months ended December 31, 2018 was 1.175. See Appendix A – Calculation of Financial Ratios.

 

Our Master Indenture also requires us to maintain an ECR at the end of each fiscal year of at least 18 percent. Our ECR equals our equity divided by the sum of our debt plus equity. Equity primarily consists of our aggregate net margins that we have not distributed in cash to our Members. Debt includes our indebtedness for borrowed money and capitalized leases but excludes indebtedness for which defeasance obligations (i.e., non-callable obligations of the United States) have been irrevocably deposited in trust. Our failure to maintain the ECR at the end of any given fiscal year would result in an event of default under the Master Indenture and restrict our ability to issue additional secured obligations under the Master Indenture. As of December 31, 2018, our ECR was 25.3 percent. See Appendix A – Calculation of Financial Ratios.

 

As of December 31, 2018, we had approximately $2.8 billion of secured indebtedness outstanding under our Master Indenture. Substantially all of our tangible assets and certain of our intangible assets are pledged as collateral under our Master Indenture. Pursuant to the Master Indenture, DSR and ECR are calculated based on unconsolidated Tri-State financials. Therefore, the details of the calculations are shown in Appendix A–Calculation of Financial Ratios.

 

Margins and Patronage Capital

 

We operate on a cooperative basis and, accordingly, seek only to generate revenues sufficient to recover our cost of service and to generate margins sufficient to meet certain financial requirements and to establish reasonable

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reserves. Revenues in excess of current period costs in any year are designated as net margins in our consolidated statement of operations. Net margins are treated as advances of capital by our Members and are allocated to our Members on the basis of revenue from electricity purchases from us. Net losses, should they occur, are not allocated to our Members but are offset by future margins.

 

Our Board Policy for Financial Goals and Capital Credits, approved and subject to change by our Board, sets guidelines to achieve margins and retain patronage capital sufficient to maintain a sound financial position and to allow for the orderly retirement of capital credits allocated to our Members. On a periodic basis, our Board will determine whether to retire any patronage capital, and in what amounts, to our Members. To date, we have retired approximately $385.5 million of patronage capital to our Members.

 

Pursuant to our Board Policy for Financial Goals and Capital Credits, we set rates to achieve a DSR and ECR in excess of the requirements under our Master Indenture in order to mitigate the risk of potential negative variances between budgeted margins and actual margins. This policy was revised in 2018 to establish a goal of our Board, which has budgetary and rate‑setting authority, to either defer revenues and incomes as a regulatory liability or recognize previously deferred revenues and incomes in an amount that will result in a DSR equal to a DSR goal for the applicable year as set forth in such policy. As allowed by our Bylaws, the deferral or recognition of previously deferred revenues and income is for the purpose of stabilizing margins and limiting rate increases from year to year. For the twelve months ended December 31, 2018, the DSR goal in our Board Policy for Financial Goals and Capital Credits was 1.175. In connection with such policy, at the end of 2018, our Board deferred $51.7 million of non-member sales revenue as a regulatory liability resulting in a DSR of 1.175 for the twelve months ended December 31, 2018. In association with the above change, our Board Policy for Financial Goals and Capital Credits was also revised to provide that our Board will endeavor to fund an internally restricted cash account for the purpose of cash funding deferred revenues and incomes held as regulatory liabilities. The amount of cash our Board may internally restrict each year is not based upon the amount of revenue and income deferred. In connection with such policy, at the end of 2018, our Board internally restricted cash in the amount of $4.6 million. Our Board may, at any time and for any reason, unrestrict any internally restricted cash.

 

Rates and Regulation