With potentially costly environmental upgrades on the horizon and the need to increase capacity over the long term, capital needs for cooperatives are growing rapidly. At the same time, traditional sources of funding are being constrained. As cooperatives increasingly turn to the markets, how can they ensure their members continue to benefit from low capital cost? This ScottMadden insight is the second in a series on “Five Strategic Priorities for Generation and Transmission Cooperatives.” The report summary can be found here: http://www.scottmadden.com/insight/516/five-strategic-priorities-for-generation-and-transmission-cooperatives.html. To learn more, please visit www.scottmadden.com.

1. Copyright © 2012 by ScottMadden. All rights reserved.
Gaining Access to Capital Markets
A Generation and Transmission Cooperative Strategic Priority
June 2012
Contact: Brad Kitchens (sbkitchens@scottmadden.com)
Marc Miller (mdmiller@scottmadden.com)

2. Copyright © 2012 by ScottMadden. All rights reserved.
Introduction
This ScottMadden insight is the second in a series on “Five Strategic Priorities for Generation and Transmission
Cooperatives.”
Contents
 Overview
 The Increasing Dependence on the Capital Markets
 The Role of Credit Ratings in Raising Capital
 Maintaining Strong Credit Ratings
 Thinking Strategically
 Contact Us
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Managing
Generation
Assets
Ensuring Grid
Security and
Reliability
Improving the
Effectiveness
of
Stakeholder
Management
Fostering
Economic
Development
Gaining
Access to
Capital
Markets

3. Copyright © 2012 by ScottMadden. All rights reserved.
2
The 21 largest cooperatives** demonstrated the following financial characteristics in 2010:
0%
20%
40%
60%
80%
100%
120%
Debt(%)
Topcooperatives
Debt/ Capitalization
-
0.50
1.00
1.50
2.00
2.50
Ratio(X)
Topcooperatives
DebtService CoverageRatio
 A median DSC ratio of 1.31x is within the
range of a Fitch study in which ratios of
public power firms rated AA or A ranged from
1.25x to 1.7x from 2005 to 2009*
 The ability to consistently maintain
relatively high debt levels (a median of
86% of total capitalization) reflects the low
risk profile of most cooperatives
*Sources: SNL Financial; RUS Form 12; ScottMadden analysis; U.S. Public Power Peer Study June 16, 2010
**Defined here as those with assets more than $1 billion or annual revenue more than $500 million
 The impact of historically high levels
of capital expenditures is evident in a
view of the consolidated balance
sheets of the 21 largest
cooperatives**
— Total Utility Plant (gross),
at the 21 largest
cooperatives has grown
more than 77% since 2001,
reaching $52 billion in
2010*
 Compounding pressures are driving
increased capital spending, yet
financing from a primary source of
cooperative funding, the Rural
Utilities Service (RUS), is declining
and becoming more restrictive (see
next page)
Regulatory & Legislative Environment
 Strong rate-making ability or positive
regulatory relationships
 Consistent engagement with key
stakeholders
Business & Economic Environment
 A diverse and growing service area
 Community support for conservation and
investments in efficiency
Management & Operations
 Experienced and effective leadership
 Competitive operational performance
 A diverse and low-cost resource mix
Financial Performance
 Strong historical financials, including
balance sheet stability, appropriate debt
service ratios, and sufficient liquidity
Four Dimensions of
Business Strength
How Do Capital Markets Judge Cooperatives?What is Driving Cooperatives to
Access Capital Markets?
With potentially costly environmental upgrades on the horizon and the need to increase capacity over the long term,
capital needs continue to intensify, and cooperatives will increasingly turn to the markets for funding.
Gaining Access to Capital Markets
Overview
Median

4. Copyright © 2012 by ScottMadden. All rights reserved.
-7%
6%
-10%
4%
-13%
-100%
-80%
-60%
-40%
-20%
0%
20%
$0
$2,000
$4,000
$6,000
$8,000
2008 2009 2010 2011 2012 2013
RUS - Electric ProgramLoans
$ MM
Amounts adjusted for inflation to April 2012 CPI
Gaining Access to Capital Markets
The Increasing Dependence on the Capital Markets
Just as capital needs are pushed higher, traditional sources of funding for cooperatives are being constrained.
3
*Sources: SNL Financial; RUS Form 12; ScottMadden analysis; Company reports; EEI Finance Department; USDA Rural Utilities Service, Electric Program; Fitch
Special Report, No Relief in Capital Spending Plans, December, 2011; Fitch Ratings, 2012 Outlook: Utilities, Power, and Gas, December 2011
Growth in the cooperative asset base is accelerating
 Cooperative capital spending, due to both stronger customer
growth than other utilities and no relief from pressures to meet
more stringent regulations, has driven growth in physical assets
 The growth in total utility plant (gross) from 2001 to 2010 for the
21 largest cooperatives has been increasingly intense
— YOY growth averaged 5.5% from 2002 to 2006 and
7.9% from 2007 to 2010
Traditional funding sources are more constrained
 Cooperatives largely rely on RUS and two cooperative lending
institutions, CoBank and National Rural Utilities Cooperative
Finance Corporation (CFC), to finance capital needs
 RUS financing is declining and becoming more restrictive,
forcing borrowers to seek out alternatives, especially for base-
load generation projects
— The President’s Budget for Fiscal Year 2013
allocated a $6.1 billion loan level and would restrict
lending on $4.0 billion of the total to renewable-
related or carbon sequestration projects
— Starting with the 2008 budget, lending for base load
coal and nuclear plants was no longer available
through RUS
Cooperatives will increasingly rely on the capital markets to fill the gap between rising investment requirements and reduced funding
from traditional sources

5. Copyright © 2012 by ScottMadden. All rights reserved.
Gaining Access to Capital Markets
The Role of Credit Ratings in Raising Capital
Although raising funding from the capital markets depends on multiple factors, the most effective means of
communicating a company’s relative strength is a strong credit rating.
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Sources: SNL Financial and EEI Finance Department, S&P, U.S. Public Power Peer Study June 16, 2010; Moody’s Rating Methodology – US Electric G&T Cooperatives
*Defined here as those with assets more than $1 billion or annual revenue more than $500 million
The 21 largest cooperatives* compare favorably to IOUs
Observations
 Although rating agencies take multiple factors into consideration,
there is a heavy weighting on key credit metrics such as debt
service coverage (DSC), times interest earned ratio (TIER), days
of cash on hand, and equity to capitalization
 In 2010, the average credit rating of the 14 co-ops that make up
Moody’s G&T cooperative sector peer group was A3, which is
upper medium grade and second only to the average rating of the
municipal sector peer group
— This is due in part to the general flexibility cooperatives
have to adjust rates and mitigate the risks of regulatory
lag and cost disallowances
 Decrease the relative amount of interest that must be paid to
service debt
 Simplify the credit review process
 Reduce the restrictiveness of debt covenants
 Facilitate the issuance of debt in both the public and private debt
markets
 Broaden the market of potential investors and lenders
 Allow for greater financial flexibility
Strong credit ratings yield numerous benefits
 The 21 largest cooperatives demonstrated excellent credit
ratings, with 86% receiving an A- rating or higher from S&P
— Only 26% of North American IOUs achieved the same
level, down from more than 60% in 2000
 Maintaining strong credit ratings, while increasing borrowing, will
be essential, which is why closely managing four dimensions of
business strength is so important (see next page)
0%
20%
40%
60%
80%
100%
Top 21 Coops US IOUs
%ofthoserated
S&P Credit Ratings
AAA
AA+, AA, AA-
A+, A, A-
BBB+, BBB
BBB-
BB+ and lower

6. Copyright © 2012 by ScottMadden. All rights reserved.
 “No single financial ratio stands apart from
the rest. On the contrary, the ratios are
examined together, providing a context for a
utility’s financial position that informs a
complete analysis.” – Fitch
 “Like public power utilities, G&T
cooperatives' highly leveraged capital
structures reflect an inability to access
capital markets to fund a perpetual equity
cushion. Low, but sound debt service
coverage ratios reflect the use of amortizing
debt and an absence of profit-related
revenues.” – S&P
A strong credit rating must be maintained over time by focusing on the factors that are critical to understanding and
enhancing four dimensions of business strength.
Gaining Access to Capital Markets
Maintaining Strong Credit Ratings
5
 “Managing through an extended period of
high capital investment is [a] principal risk
to bondholders, should adequate and timely
returns on investment not be authorized.” –
Fitch
 “The extent to which a G&T coop can
ensure timely and full recovery of its costs
and investments will have an integral effect
on its overall financial performance and
thus its credit worthiness.” – Moody’s
 “Cooperative utilities with rate-setting
authority have shown they are willing to
raise rates as needed to maintain their
financial metrics.” – S&P
 “The pace of environmental regulatory
compliance, direction of fuel prices and
economic trends are a source of continuing
uncertainty, which then places a greater
weight on utility management to skillfully
navigate the operating environment.” –
Moody’s
 “As the highly coal dependent cooperative
sector’s power plants reach the end of their
useful lives, the regulations’ operational and
cost consequences will rise to the fore and
color utilities’ resource decisions.” – S&P
 “[Cooperatives] willingness to [proactively
raise rates to meet increasing costs] may
come under growing pressure in 2012, as
recent rate increases, coupled with
persistent declines in median household
income levels, have eroded affordability
metrics over the past three years.” – Fitch
 “Low natural gas prices have helped many
utilities reduce operating costs and
emissions, but those cooperatives with long
generation positions, and that rely on
selling surplus power to nonmember
customers, have found themselves in a tight
position as shrinking wholesale electricity
prices have reduced sales' margins.” – S&P
Regulatory &
Legislative
Environment
Business &
Economic
Environment
Management &
Operations
Financial
Performance
Four Dimensions of
Business Strength
*Sources: Moody’s Rating Methodology – U.S. Electric G&T Cooperatives, December 2009; S&P Rate Changes crucial for cooperatives to withstand EPA regulations, weak economy; Fitch Public
Power Methodology, March 2011; Fitch U.S. Public Power Rating Criteria, January 2012; S&P Criteria for rating public power companies, February 2011

7. Copyright © 2012 by ScottMadden. All rights reserved.
In today’s dynamic and challenging environment, it is more important than ever to ask the right questions and truly
understand the implications of the answers.
 How can we increase the likelihood that our regulators make decisions that are credit supportive?
 How should we prepare to react to pending and potential legislation?
 Are we positioned for strong performance in the economy we are forecasting? Are our members?
 How are we recognizing and mitigating the adverse risks in today’s rapidly changing business environment?
 Have we planned our resource portfolios effectively? Are we getting the most out of the assets we have?
 Do we have the right management team to pursue our strategy?
 Is our balance sheet strong enough to facilitate necessary investment and protect our members against adverse impacts?
 Meet formal targets for financial metrics (e.g., DSC, equity/capitalization, and days of cash on-hand)
 Improve our credit rating and take advantage of low interest rates to minimize financing costs
 Implement an integrated planning process and align the organization on pursuit of key performance measures
 Develop a comprehensive asset management strategy and appropriately diversify our portfolio of generation assets
 Recognize and engage consistently with our key stakeholders and improve important relationships
 Commit to economic development and pursue focused and measurable objectives
Gaining Access to Capital Markets
Thinking Strategically
6
Possible Goals for the Organization
Practical Questions for Management

8. Copyright © 2012 by ScottMadden. All rights reserved.
Contact Us
ScottMadden has undertaken numerous consulting projects for cooperatives across the country. If you are interested in
learning more about gaining access to capital markets, please contact us.
Brad Kitchens
President and CEO
ScottMadden, Inc.
3495 Piedmont Rd, Bldg 10
Suite 805
Atlanta, GA 30305
Phone: 404-814-0020
sbkitchens@scottmadden.com
Marc Miller
Director
ScottMadden, Inc.
3495 Piedmont Rd, Bldg 10
Suite 805
Atlanta, GA 30305
Phone: 404-814-0020
mdmiller@scottmadden.com
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