Fitch Affirms Tri-State Generation & Transmission, CO's Revs at 'A'; Unsecured Certificates at 'A-'

NEW YORK--()--Fitch Ratings affirms the following Tri-State Generation & Transmission Association, CO's (Tri-State) debt obligations, as part of its continuous surveillance effort:

--$39.5 million Gallup County, NM pollution control revenue bonds (fixed-rate), affirmed at 'A';

--$708.4 million pass-through certificates (Springerville Project), series 2003 A & B, affirmed at 'A-';

--$219 million secured revolving credit facility, affirmed at 'A'.

The Rating Outlook is Stable.

SECURITY:

--The pollution control bonds are secured by the payment obligation of Tri-State pursuant to the Financing Agreement, dated as of July 1, 2005 with the City of Gallup, New Mexico. Tri-State's obligation to pay debt service on the pollution control bonds is secured by a master first mortgage indenture, deed of trust and security agreement placed on all property of Tri-State (as amended, restated and supplemented effective July 12, 2005). The bonds are not secured by the general credit or taxing power of the city.

--The rating on the pass-through certificates is based upon the underlying senior unsecured rating of Tri-State, pursuant to a 34-year operating lease entered into in 2003, which entitles Tri-State to lease 100% of Springerville Unit #3, a 418 MW coal fired generating unit located in Arizona. Under the lease agreement, Tri-State is obligated to make rental payments (which include the debt service component) to the owner of the Springerville Unit. Given the operating lease structure, and the fact that Tri-State's rental payments are paid as an operating expense of Tri-State, payment of the pass through certificates is secured by the electric system revenues of Tri-State and the collateral pledge of the single generating unit (solely a Springerville #3 collateral pledge).

RATING RATIONALE:

--Tri-State has shown continued improvement in its financial performance and in meeting its previously established financial goals, with debt service coverage (1.22 times [x]), days operating cash (107) and equity capitalization (20%) at or above 'A' rating category medians.

--Tri-State benefits from having all-requirements contracts with 42 of its 44 members that were extended to 2050 - well beyond current final debt maturities in 2039.

--Tri-State benefits from serving distribution members across four states with diverse economies, geographies, climate, and load shapes. Tri-State's load factor is extremely efficient at close to 70%.

--A credit concern is the rising average member wholesale rate (includes generation and transmission cost), currently at 6.5 cents per kilowatt-hour (kWh) for 2009. While the wholesale rate remains competitive for the Rocky Mountain region, members' delivered retail rates are relatively high for the region.

--Tri-State has a notable, though scaled down, five-year capital expenditure program (approximately $2.5 billion), which accounts for a majority of pressure on rates in the future. Positively, the capital program is heavily transmission-weighted as opposed to new generation.

--The economic recession has slowed the rate of sales growth for Tri-State's members, which has favorably pushed out to 2016 the need for additional baseload generation.

KEY RATING DRIVERS:

--Tri-State's ability to cost effectively manage its load growth and associated large capital program.

--The Board's willingness to continue to pass through rate increases to maintain the stronger financial goals established for Tri-State during this period of substantial capital expenditures and weakened state of the national economy.

--Tri-State has identified carbon emission and climate change legislation as a major risk and has reviewed the potential cost of a tax on emissions and the impact on rates. While not unique to Tri-State, its dependence on fossil fuels is significant and could result in increased costs in the long term. Fitch will monitor the potential impact of carbon reduction legislation on Tri-State's financial and credit profile as policies and regulations are formulated and enacted.

--While still in its early stages, an unfavorable ruling on the lawsuit brought by five members contesting the application of the postage stamp rate could negatively impact Tri-State as it could set a precedent for challenging the cooperative's structure and the contracts in place.

CREDIT SUMMARY:

Over the past few years, Tri-State has scaled back its dependence on coal-fired new generating resources in its power supply plan and has developed a more reasonable, balanced 10-year power supply strategy, incorporating more long-term purchases, greater renewable resources and energy efficiency initiatives. Overall, the plan is comparable to other utilities in the region. The reduced capital plan has resulted in the need for smaller wholesale rate adjustments than previously forecast.

The original power supply plan (2006) had included construction of at least two, 700-MW each, coal fired generating plants at the Holcomb generating station in Kansas, at an estimated cost of about $3.5 billion. Tri-State's plan to build additional coal units at Holcomb has been a challenge. Faced with regulatory and environmental backlash against the addition of new coal-fired generation in the state of Kansas, the new Holcomb generating units have not been able to attain their air permits. Tri-State will continue to pursue the matter legally, assuming the new units continue to be economically viable and Tri-State's member load growth persists as projected. Given the uncertainty with the project to-date and the slowed member sales growth, Tri-State has revised its power supply plan and pushed the planned construction of a single Holcomb unit beyond its original 2013 start date to 2016 at the earliest.

In working to meet the RPS goals for member systems, Tri-State has contracted with First Solar, Inc. to develop a solar photovoltaic power plant, Cimmaron I project, with 30 MWs of capacity in northeastern New Mexico. The Cimmaron I project is scheduled to begin construction in spring of 2010 with the project expected to be completed by the end of 2010. Tri-state has entered into a 25-year contract to purchase the output from the facility. The energy from the project will play an integral role in meeting the RPS standards of its member systems. In addition, the 51 MW Kit Carson wind project is expected to come on-line in 2010 and along with Cimmaron I project, Tri-State is expected to be fully compliant with New Mexico and Colorado's RPS requirements through 2014.

Tri-State Generation and Transmission Association, Inc. is a taxable, not-for-profit wholesale power supply cooperative, providing power to 44 rural member distribution systems throughout four states: Colorado (18 members), Wyoming (8), Nebraska (6) and New Mexico (12). The member systems provide retail electric service to approximately 600,000 users, or a population base of about 1.4 million.

The members' retail customer base is adequately diversified, with residential, industrial, commercial, irrigation and other users accounting for 33%, 34%, 22%, 10% and 5%, respectively, for 2009. The vast majority of operating revenues are derived from sales to member systems (roughly 79% in 2008), and the rest is attributable to non-member, mostly contracted sales (i.e., with Public Service Co. of Colorado, Salt River Power and Shell Energy).

Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include:

--'Revenue-Supported Rating Criteria' (Dec. 29, 2009).

--'Public Power Rating Guidelines' (June 11, 2009).

Additional information is available at 'www.fitchratings.com'.

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Contacts

Fitch Ratings, New York
Eric V. Espino, 212-908-0574
Lina Santoro, 212-908-0522
or
Media Relations:
Cindy Stoller, 212-908-0526
Email: cindy.stoller@fitchratings.com

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Contacts

Fitch Ratings, New York
Eric V. Espino, 212-908-0574
Lina Santoro, 212-908-0522
or
Media Relations:
Cindy Stoller, 212-908-0526
Email: cindy.stoller@fitchratings.com