Big Pivots: Tri-State’s latest credit slip
S&P Global Ratings has lowered its long-term rating for Tri-State Generation and Transmission to BBB from the previous BBB+ for two debts, one having to do with the financing for the construction of its coal-fired power unit in Arizona, at Springerville, and for the pollution control work done more than a decade ago at its Craig Generating Station.
In the same report on April 25, S&P said that a drop of a full notch or more may be possible if Tri-State cannot sustain sound debt service coverage, whether due to insufficient rate relief, member departures, discord, higher-than-expected costs attributable to the capital plan, the costs of complying with environmental regulators, or if recouping costs over a smaller base creates financial burdens.
“In addition, if member discord or carbon intensity frustrates capital market access, we could lower the rating,” said S&P.
However, S&P affirmed the A-2 rating on up to $500 million of Tri-State’s commercial paper, i.e. its unsecured, short-term debt.
Tri-State’s credit rating has been steadily sliding since November 2019. Before that, it had consistently held an “A” rating. Since then, Delta-Montrose Electric has left and now United Power, alone responsible for 20% of the demand for Tri-State’s electricity. Three others among Tri-State’s 42 members have served notice they intend to leave.
Along the way, S&P has lowered the rating from A to A- and then, two years ago, to BBB+. In January 2022 the outlook was revised from “stable” to “negative.” The outlook remains negative.
“The downgrade reflects the effects of constraints on financial flexibility while the cooperative navigates ongoing rate proceedings, member initiatives to separate from Tri-State, and evolving environmental considerations,” said David Bodek, a credit analyst with S&P Global Ratings.
S&P said the negative outlook “reflects the depletion of a substantial portion of deferred revenue balances that serve as rate stabilization funds.” It also pointed to uncertainty about future rate increases as well as potential heightened credit exposures as members exit. S&P views those withdrawals as “an expression of dissatisfaction with Tri-State’s rates, fuel mix and/or strategies.”
Revising the outlook to stable will depend on several elements, said S&P, including rate relief, the adequacy of compensation Tri-State receives from departing members through the contract-termination proceedings, and the ability to operate cohesively if they remain.
If members depart “revising the outlook to stable will hinge on Tri-State’s ability to operate on smaller scale without burdening remaining customers with higher costs as economies of scale diminish.”
In a posting the same day as S&P issued its frown, Tri-State offered an optimistic smile. Tri-State’s ratings remain classified as investment grade, it said, and the wholesale cooperative “maintains its strong financial position.”
Tri-State has not raised wholesale rates to its members since 2017 and, in 2021, lowered the rates 4%. However, it plans to raise rates in January 2024.
“In 2023, we expect clarity on vitally important contract termination payment issues from the Federal Energy Regulatory Commission,” said Duane Highley, the chief executive. “S&P correctly notes the important role of the Commission to address member exits and concerns with cost-shifting.”
Allen Best is a Colorado-based journalist who publishes an e-magazine called Big Pivots. Reach him at firstname.lastname@example.org or 720-415-9308. For more, go to BigPivots.com.
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