Tri-State G&T faced with co-ops leaving and a stalled rate increase sees bond ratings drop
Energize Weekly, April 10, 2024
Facing the departure of four member cooperatives and the failure to get federal regulators to approve a rate increase, Tri-State Generation and Transmission Association bonds were downgraded by two rating agencies.
Fitch Ratings and Moody’s Investors Service – two of the three national bond rating agencies – have lowered the ratings on $1.6 billion to $2 billion of Tri-State’s bonds.
Moody’s dropped the association to BBB+ from A-, and the Fitch score went to Baa1 from A- on one set of bonds and Baa2 from Baa1 for another. Fitch also lowered its rating outlook to negative, while Moody’s upgraded it to stable from negative.
The third rating agency, S&P Global Ratings, had lowered its Tri-State ratings last April.
The agencies said there were two reasons for the downgrade: the association’s inability for almost a year to win approval for a rate increase and the departure of the member cooperatives.
“Today’s rating action reflects the recent rejection by the Federal Energy Regulatory Commission (FERC) of Tri-State’s formula rate request preventing Tri-State to recover ongoing higher fuel and purchased power costs on a timely basis thereby straining its near-term cash flow,” Moody’s said in its April 1 note.
On May 1, two cooperative members – Brighton, Colorado-based United Power, the association’s largest co-op, and Hay Springs, Nebraska-based Northwest Rural Public Power District (NRPPD) – will leave Tri-State.
They will be followed in 2025 by Granby, Colorado-based Mountain Parks Electric and in 2026 by the Durango, Colorado-based La Plata Electric Association.
Previously, two other co-ops – the Kit Carson Electric Cooperative, in Taos, New Mexico and the Montrose, Colorado-based Delta-Montrose Electric Association – left the association.
The four departing cooperatives accounted for about 28 percent of revenues. Kit Carson and Delta-Montrose were about 5 percent of revenue, according to Moody’s. With the departures, Tri-State will have 38 member cooperatives.
“This ongoing member discontent and threat of further withdrawals represents an asymmetric management and governance risk that is factored into the overall rating determination,” Fitch said.
Created in 1952 to provide electricity to rural cooperatives in Nebraska, Wyoming, Colorado and New Mexico, Tri-State built a network of eight power plants – including several coal-fired units – and 5,800 miles of transmission lines to serve far-flung rural communities.
As a nonprofit company, Tri-State cannot issue shares and must rely on bond and credit markets for capital to build its system. At the end of 2023, it had $3.32 billion in debt, rising to $3.8 billion by 2028, according to a federal filing.
In a rapidly changing electricity market with new low-cost competitors and demands for cleaner energy, a number of Tri-State’s member cooperatives have been restive.
Some cooperatives have been unhappy with Tri-State’s 50-year contracts that require them to buy 95 percent of their electricity from the association, limiting development of local projects, especially new solar arrays. Others were concerned Tri-State relied too much on fossil fuels and that its rates were too high.
At Tri-State’s annual meeting April 3, Duane Highley, Tri-State’s CEO, said the association is moving to address many of these issues.
“I would say in the words of Samuel Clemens, the news of our death has been greatly exaggerated and maybe we should base our fears and our optimism on reality,” Highley said.
In their assessments Fitch and Moody’s said the association still has low operating risk and a good liquidity – cash positions – and its bonds remain investment grade, adding an upgrade could come with a resolution of the rate case and stability in membership.
FERC has rejected several Tri-State-proposed rate formulas since the rate hike was first filed in July 2023, but Highley said the rate case would be resolved later this year.
In its last rejection order, March 15, FERC agreed — in some cases over the objections of member cooperatives – with some of the association’s formulas, leaving only the allocation of some costs to be resolved.
In response to the criticism that it has been too heavily dependent on fossil fuels and a requirement by Colorado that it file a clean energy plan, Tri-State has developed a plan to move to 70 percent renewable energy by 2030 – it will be at 50 percent by 2025.
The clean energy plan will cut the association’s greenhouse gas emissions by 89 percent, Highley said.
At the end of 2023, coal-fired plants made up 36 percent of the association’s 4.2 gigawatts of generation, with natural gas accounting for another 19 percent, according to Fitch. Renewables were 32 percent, and contracts to buy power made up the rest.
This summer, the association will unveil a plan to enable co-ops to build their own projects and generate as much as 40 percent of their load. “It’s called Bring Your Own Resource,” Highley said. “We will be filing that this summer at the Federal Energy Regulatory Commission.”
Highley also said that there will be ample funds to finance the transition and to keep the remaining members financially whole.
Departing cooperatives must pay a contract termination fee to cover their portion of the association’s debt and other costs. Tri-State calculated the exit fees, based on a formula prescribed by FERC, at $709 million for United Power and $41 million for the NRPPD.
United Power contends that Tri-State miscalculated the FERC formula. The issue is now before the commission.
Tri-State has also applied for hundreds of millions from the federal New ERA fund, The $9.7 billion fund, administered by the U.S. Department of Agriculture, aims to help cooperatives transition to clean energy.
“That’s going to help us manage the cost of that transition,” Highley said. “Between New ERA and the contract termination payments, we’re talking about well over a billion dollars in cash that’s coming into Tri-State.”
