Fitch Rates Lower Colorado River Authority's (Texas) $202.6MM 2008 Rfdg & Improvement Revs 'A+'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Lower Colorado River Authority's (LCRA), $202.6 million refunding and improvement revenue bonds, series 2008. The Rating Outlook is Stable. In addition, Fitch has affirmed LCRA's outstanding revenue bonds at 'A+'. Proceeds from the 2008 bonds will refund certain outstanding commercial paper and fund certain improvements to the system. The bonds are expected to price the week of May 13, 2008.

Key rating factors reflected in LCRA's 'A+' rating include the following:

Strengths:

--Low cost power resources sold to 43 wholesale customers;

--Favorable fuel mix;

--Experienced management;

--Historically stable financial performance.

Concerns:

--Ongoing uncertainty about customers contract extensions;

--Diverging needs of wholesale customers;

--Large capital needs associated with environmental improvements;

--Increasing amount of debt beyond contracts final maturity in 2016.

Also reflected in the 'A+' rating are recent management changes with the hiring of Thomas Mason as the new General Manager (GM) and the retirement of John Meismer the Chief Financial Officer (with W. Brady Edwards as interim CFO and Treasurer) effective January 2008. Mr. Mason was the General Counsel at LCRA since 1999; and joined LCRA in 1987. Prior to LCRA, he was at Texas Water Development Board.

While LCRA has signed amended contracts with 31 customers for about 30% of its load, it continues to negotiate terms with the remaining large customers (70% of load). Looking forward, the successful negotiation of new contracts and the terms of those contracts will be a key credit driver. Fitch will continue to monitor LCRA's contract negotiation process, as this also impacts how LCRA will plan for and finance generation needs beyond existing contracts, given the customers growing needs and that ERCOT is projected to be short capacity beginning in 2010. Overall, the 'A+' rating takes into account LCRA's cost competitiveness in the ERCOT power market, the customers' growing power needs, and the belief that the customers see value in continuing their long standing relationship with LCRA.

LCRA anticipates that the customers will need additional base-load generation by the years 2010-2012 (250-500 mw) as well as a 200 MW gas fired peaking facility to help reduce dependence on market purchases. Additionally, management continues to expect future growth in its water and electric transmission business with additions to the water and wastewater systems financed with LRCA debt, and transmission additions funded through LCRA's affiliate TSCorp. Other fundamental credit characteristics of LCRA include historically solid financial performance with financial results for fiscal year 2007 showing solid debt service coverage of about 1.47 times (x) for the water and power system, equity of 24% and sufficient cash on hand to fund 112 days of operating expenses.

LCRA is a public power wholesale provider in Texas serving eight electric cooperatives, 34 cities, and one investor owned utility. The utility also provides regional water and wastewater services in its service area, and manages water supplies and controls flooding along the Colorado River of Texas. LCRA manages its operations through four primary business units: Wholesale Power Services, Transmission Services, Water Services, and Community Services. Wholesale Power Services accounts for about 78% of operating revenues, followed by Water Services at 6%, and transmission support services at 16%. Revenues originally associated with transmission have been shifted from LCRA to its affiliate TSCorp, a nonprofit corporation. TSCorp was formed to separate LCRA's transmission business from electric generation as required under the Texas electricity restructuring legislation (Senate Bill 7), and allow LCRA to provide transmission services throughout Texas, for LCRA and other contracted entities.

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