UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 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)

(303) 452-6111

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐    No ☐    (Note: The registrant is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), but voluntarily files reports with the Securities and Exchange Commission. The registrant has filed all Exchange Act reports for the preceding 12 months (or for such shorter period that the registrant was required to file such reports)).

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one): Large accelerated filer ☐    Accelerated filer ☐    Non-accelerated filer ☒    (Do not check if a smaller reporting company)  Smaller reporting company ☐    Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐    No ☒

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

TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2018

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10‑Q contains “forward‑looking statements.”  All statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate to occur in the future, including matters such as the timing of various regulatory and other actions, future capital expenditures, business strategy and development, construction or operation of facilities (often, but not always, identified through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “projection,” “target” and “outlook”) are forward‑looking statements.

Although we believe that in making these forward‑looking statements our expectations are based on reasonable assumptions, any forward‑looking statement involves uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied by these forward‑looking statements.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Tri-State Generation and Transmission Association, Inc.

Consolidated Statements of Financial Position

(dollars in thousands)

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

Tri-State Generation and Transmission Association, Inc.

Consolidated Statements of Operations (unaudited)

(dollars in thousands)

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

Tri-State Generation and Transmission Association, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

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

Tri-State Generation and Transmission Association, Inc.

Consolidated Statements of Equity (unaudited)

(dollars in thousands)

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

Tri-State Generation and Transmission Association, Inc.

Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)

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

Tri-State Generation and Transmission Association, Inc.

Notes to Unaudited Consolidated Financial Statements

For the Three Months Ended March 31, 2018 and 2017

NOTE 1 – PRESENTATION OF FINANCIAL INFORMATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2017 filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. Our consolidated financial position as of March 31, 2018, results of operations for the three months ended March 31, 2018 and 2017, and cash flows for the three months ended March 31, 2018 and 2017 are not necessarily indicative of the results that may be expected for an entire year or any other period.

Basis of Consolidation

Our consolidated financial statements include the accounts of Tri-State Generation and Transmission Association, Inc. (“Tri-State”, “we”, “our”, “us” or “the Association”), our wholly-owned and majority-owned subsidiaries, and certain variable interest entities for which we or our subsidiaries are the primary beneficiaries. See Note 16 – Variable Interest Entities. Our consolidated financial statements also include our undivided interests in jointly owned facilities. All significant intercompany balances and transactions have been eliminated in consolidation. 

Jointly Owned Facilities

We own undivided interests in two jointly owned generation facilities that are operated by the operating agent of each facility under joint facility ownership agreements with other utilities as tenants in common. These projects include the Yampa Project (operated by us) and the Missouri Basin Power Project (“MBPP”) (operated by Basin Electric Power Cooperative (“Basin”)). Our ownership in the San Juan Project terminated December 31, 2017. Each participant in these agreements receives a portion of the total output of the generation facilities, which approximates its percentage ownership. Each participant provides its own financing for its share of each facility and accounts for its share of the cost of each facility. The operating agent for each of these projects allocates the fuel and operating expenses to each participant based upon its share of the use of the facility. Therefore, our share of the plant asset cost, interest, depreciation and other operating expenses is included in our consolidated financial statements.

Our share in each jointly owned facility is as follows as of March 31, 2018 (dollars in thousands):

Reclassifications

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

Accounting Pronouncements-Recently Adopted

We adopted Accounting Standards Update (“ASU”) 2016‑01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, as of January 1, 2018. This amendment requires an entity to measure investments in equity securities (except those accounted for under the equity method, those that result in consolidation of the investee and certain other investments) at fair value and recognize changes in fair value in net income. However, for equity investments that don’t have readily determinable fair values and don’t qualify for the existing practical expedient in Accounting Standards Codification (“ASC”) 820, Fair Value Measurements, to estimate fair value using the net asset per share of the investment, the amendment provides a new measurement alternative. Entities may choose to measure those investments at cost less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Our investments in other associations do not have readily determinable fair values and we have utilized the measurement alternative provided by this amendment. As such, the adoption of ASU 2016-01 did not have an impact on our accounting for investments in other associations. We account for our investment in Trapper Mining, Inc. (“Trapper Mining”) using the equity method. Therefore, this investment is not subject to the fair value measurement requirements of ASU 2016-01.

We adopted ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, as of January 1, 2018. This amendment disaggregates the accounting for the service cost component of the net periodic benefit cost of an entity’s defined pension and other postretirement benefit plans from the other components of the net periodic benefit cost (such as interest expense, recognition of actuarial gain or loss on postretirement benefit obligations and amortization of prior service cost or credit). The service cost component is to be included in the same income statement line item(s) as other compensation costs arising from services rendered during the period. The other components of the net periodic benefit cost are to be included separately from the line item(s) that include service cost and outside of any subtotal of operating income, if one is presented. The adoption of this amendment did not have a material impact on our consolidated statements of operations.

We adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as of January 1, 2018. This amendment provides a revenue recognition model where revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new revenue recognition standard also requires enhanced quantitative and qualitative disclosures to enable users of financial information to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted ASU 2014-09 using the modified retrospective transition method where prior year results are not restated; however, a cumulative-effect adjustment, if any, is required to be recognized in patronage capital equity at the date of adoption (January 1, 2018). Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605. Completed contracts that begin and end in the same annual reporting period are not restated. The standard was applied to contracts that were not complete at the date of initial application. For contracts that were modified before the beginning of the earliest reporting period presented, we have not retrospectively restated the contract for those modifications. There was no impact on our consolidated statements of operations as a result of adopting this amendment.

Accounting Pronouncements-Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). Topic 842 supersedes the lease recognition requirements in ASC 840, Leases. Under Topic 842, a lessee is required to recognize lease assets (right-of-use assets) and lease liabilities on the balance sheet for most leases and provide enhanced qualitative and quantitative disclosures. The right-of-use asset represents a lessee’s right to use (control the use of) the underlying asset for the lease term. The lease liability represents a lessee’s obligation to make lease payments. The right-of-use asset and the lease liability are initially measured at the present value of the lease payments over the lease term.

For finance leases, the lessee subsequently recognizes interest expense and amortization of the right-of-use asset, similar to accounting for capital leases under Topic 840. For operating leases, the lessee subsequently recognizes straight-line lease expense over the life of the lease, similar to accounting for operating leases under Topic 840. Lessor accounting remains substantially the same as that applied under Topic 840. Topic 842 includes an accounting policy election by class of underlying asset to exclude short-term leases. A short-term lease is defined as a lease that, at commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This amendment is required to be applied using a modified retrospective transition method with the option to elect a package of practical expedients which includes not being required to reassess expired or existing contracts that were assessed under Topic 840, the lease classification for any expired or existing leases that were assessed under Topic 840, and accounting for the initial direct costs for any existing leases. We are currently evaluating the impact of Topic 842 on our consolidated financial statements. This evaluation process includes establishing a lease project working group, identifying and reviewing our leases, performing a completeness assessment of the lease population, analyzing the Topic 842 practical expedients and selecting a lease software solution. We plan to adopt ASU 2016-02 beginning in the first quarter of 2019 and anticipate that the adoption of the amendment may have a significant impact on our consolidated statements of financial position as all leases will be recognized as right-of-use assets and lease obligations.

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

NOTE 2 – ACCOUNTING FOR RATE REGULATION

We are subject to the accounting requirements related to regulated operations. In accordance with these accounting requirements, some revenues and expenses have been deferred at the discretion of our Board of Directors (“Board”), which has budgetary and rate-setting authority, if it is probable that these amounts will be refunded or recovered through future rates. Regulatory assets are costs that we expect to recover from our member distribution systems (“Members”) based on rates approved by our Board in accordance with our rate policy. Regulatory liabilities represent probable future reductions in rates associated with amounts that are expected to be refunded to our Members based on rates approved by our Board in accordance with our rate policy. We recognize regulatory assets as expenses and regulatory liabilities as operating revenue, other income, or a reduction in expense concurrent with their recovery in rates.

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

NOTE 3 – INVESTMENTS IN OTHER ASSOCIATIONS  

Investments in other associations include investments in the patronage capital of other cooperatives and other required investments in the organizations. Our investment in a cooperative increases when a cooperative allocates patronage capital credits to us and it decreases when we receive a cash retirement of the allocated capital credits from the cooperative. A cooperative allocates its patronage capital credits to us based upon our patronage (amount of business done) with the cooperative.

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

Patronage capital represents retained margins in a cooperative which is the equity in that cooperative. Therefore, the investments in the patronage capital of other cooperatives and other required investments in the organizations meet the definition of an equity security, as defined by the accounting requirements related to investments in equity securities. However, these investments don’t have readily determinable fair values (defined as observable price changes of identical or similar investments, such as in an organized market). Therefore, we measure these investments at cost less impairment. We have evaluated our investments in the patronage capital of other cooperatives and other required investments in the organizations for indicators of impairment. There were no impairments of these investments recognized for the three months ended March 31, 2018 and the comparable period in 2017.

NOTE 4 – INVESTMENTS IN AND ADVANCES TO COAL MINES  

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

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

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

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

Restricted cash and investments represent funds designated by our Board for specific uses and funds restricted by contract or other legal reasons. A portion of the funds are funds that have been restricted by contract that are expected to be settled within one year. These funds are therefore classified as current on our consolidated statements of financial position. The other funds are for funds restricted by contract or other legal reasons that are expected to be settled beyond one year. These funds are classified as noncurrent and are included in other assets and investments on our consolidated statements of financial position.

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

NOTE 6 – CONTRACT ASSETS AND CONTRACT LIABILITIES

Contract Assets

A contract asset represents an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance). We have no contract assets as of March 31, 2018.

Accounts Receivable

We record accounts receivable for our unconditional rights to consideration arising from our performance under contracts with our Members and other parties. Uncollectible amounts, if any, are identified on a specific basis and charged to expense in the period determined to be uncollectible. See Note 13 – Revenue.

Contract liabilities (unearned revenue)

A contract liability represents an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer. We have received deposits from others and these deposits are reflected in unearned revenue (included in other deferred credits and other liabilities on our consolidated statements of financial position) before revenue is recognized, resulting in contract liabilities. During the three months ended March 31, 2018, we recognized $0.2 million of this unearned revenue in other operating revenues on our consolidated statements of operations.

Our contract assets and liabilities consist of the following (dollars in thousands):

NOTE 7 – OTHER DEFERRED CHARGES  

We make expenditures for preliminary surveys and investigations for the purpose of determining the feasibility of contemplated generation and transmission projects. If construction results, the preliminary survey and investigation expenditures will be reclassified to electric plant ‑ construction work in progress. If the work is abandoned, the related preliminary survey and investigation expenditures will be charged to the appropriate operating expense account or the expense could be deferred as a regulatory asset to be recovered from our Members in rates subject to approval by our Board, which has budgetary and rate-setting authority.

We make advance payments to the operating agents of jointly owned facilities to fund our share of costs expected to be incurred under each project including MBPP – Laramie River Station, and Yampa Project – Craig Generating Station Units 1 and 2. We also make advance payments to the operating agent of Springerville Unit 3.

During 2016, we entered into two forward starting interest rate swaps to hedge a portion of our future long-term debt interest rate exposure. One of these interest rate swaps was settled in October 2017. The realized gain of $4.6 million related to the settlement of this interest rate swap was deferred as a regulatory liability in accordance with the accounting requirements related to regulated operations. This realized gain is being amortized to interest expense over the 12-year term of the associated private placement debt issuance. The unrealized gain of $8.4 and $4.3 million as of March 31, 2018 and December 31, 2017, respectively, on the remaining interest rate swap was deferred in accordance with the accounting requirements related to regulated operations. See Note 2 – Accounting for Rate Regulation.

Other deferred charges are as follows (dollars in thousands):

NOTE 8 – LONG-TERM DEBT

The mortgage notes payable and pollution control revenue bonds are secured on a parity basis by a Master First Mortgage Indenture, Deed of Trust and Security Agreement (“Master Indenture”) except for two unsecured notes in the aggregate amount of $39.7 million as of March 31, 2018. Substantially all our assets, rents, revenues and margins are

pledged as collateral. The Springerville certificates are secured by the assets of Springerville Unit 3. All long-term debt contains certain restrictive financial covenants, including a debt service ratio requirement and equity to capitalization ratio requirement. 

As of March 31, 2018, we had a secured revolving credit facility with Bank of America, N.A. and CoBank, ACB as Joint Lead Arrangers in the amount of $750 million (“2011 Revolving Credit Agreement”) extending through July 26, 2019. We had no outstanding borrowings at March 31, 2018 and no outstanding borrowings at December 31, 2017. As of March 31, 2018, we had $560.0 million in availability (including $310.0 million under the commercial paper back-up sublimit) under the 2011 Revolving Credit Agreement.

On April 25, 2018, the 2011 Revolving Credit Agreement was terminated and replaced by a new secured revolving credit facility with National Rural Utilities Cooperative Finance Corporation, as lead arranger and administrative agent, in the amount of $650 million (“2018 Revolving Credit Agreement”).

The 2018 Revolving Credit Agreement has a maturity date of April 25, 2023, unless extended as provided therein.

On November 16, 2017, we entered into a Note Purchase Agreement with a group of institutional investors to sell our First Mortgage Obligations, Series 2017A in an aggregate principal amount of $120 million, consisting of $60 million of our 3.34 percent First Mortgage Obligations, Series 2017A Notes, Tranche 1, due December 12, 2029, and $60 million of our 3.39 percent First Mortgage Obligations, Series 2017A Notes, Tranche 2, due December 12, 2029 in a private placement pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. The closing of the sale of the Series 2017A Notes, Tranche 1 occurred on December 12, 2017 and the closing of the sale of the Series 2017A Notes, Tranche 2 occurred on April 12, 2018.

Long-term debt consists of the following (dollars in thousands):

We are exposed to certain risks in the normal course of operations in providing a reliable and affordable source of wholesale electricity to our Members. These risks include interest rate risk, which represents the risk of increased operating expenses and higher rates due to increases in interest rates related to anticipated future long-term borrowings. To manage this exposure, we have entered into forward starting interest rate swaps to hedge a portion of our future long‑term debt interest rate exposure. On October 12, 2017, in conjunction with the pricing on the offering of the First Mortgage Obligations, Series 2017A, we settled the interest rate swap entered into in 2016, which resulted in a realized gain of $4.6 million that has been deferred as a regulatory liability and is being amortized to interest expense over the 12-year term of the First Mortgage Obligations, Series 2017A. We anticipate settling the remaining interest rate swap in conjunction with the issuance of future long-term debt. See Note 2 ‑ Accounting for Rate Regulation and Note 15 ‑ Fair Value.

The terms of the remaining interest rate swap contract are as follows (dollars in thousands):

NOTE 9 – SHORT-TERM BORROWINGS   

We have a commercial paper program under which we issue unsecured commercial paper in aggregate amounts not exceeding the commercial paper back-up sublimit under our secured revolving credit facility, which is the lesser of $500 million or the amount available under our secured revolving credit facility. The commercial paper issuances are used to provide an additional financing source for our short-term liquidity needs. The maturities of the commercial paper issuances vary, but may not exceed 397 days from the date of issue. The commercial paper notes are classified as current and are included in current liabilities as short-term borrowings on our consolidated statements of financial position.

Commercial paper consisted of the following (dollars in thousands):