Fitch Affirms Tri-State Generation & Transmission, CO's Sr Secured Rating at 'A'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'A' rating to Tri-State Generation & Transmission Association, Inc., CO's ('Tri-State') completion of 2010 debt issuance, initially rated by Fitch on May 27, 2010, as follows:

--$100 million, first mortgage bonds (taxable issuance under the Securities Act Rule 144A).

Due to market conditions back in June 2010, Tri-State only issued $400 million of the authorized $500 million of first mortgage bonds, which were rated 'A' by Fitch at that time. Market conditions have improved such that on Oct. 5, 2010, Tri-State is selling the remaining $100 million of first mortgage bonds authorized last spring.

In addition, Fitch also affirms the following outstanding debt obligations of Tri-State:

--$692 million, parity first mortgage bonds (taxable, 144A securities) at 'A';

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

--$681 million (unsecured) pass-through certificates for the Springerville generating project, series 2003 A & B at 'A-';

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

The Rating Outlook is Stable. It is important to note that Tri-State's ratings take into account another $1.4 billion in non-publicly held (not rated) parity secured obligations. These debt obligations were privately borrowed from the USDA's Rural Utilities Service (RUS), National Rural Utilities Cooperative Finance Corporation, and Cobank - frequent lenders to electric cooperatives.

TRANSACTION PURPOSE AND SECURITY:

Tri-State will use the 2010 first mortgage bond proceeds to advance fund anticipated capital expenditures in the 2012-2014 timeframe and to redeem a secured revolving credit facility ($219 million) that terminates in January 2012. Given the exceptionally low Treasury yields at the present time, Tri-State is opting to currently issue the taxable debt to take advantage of the low interest rate environment, rather than wait until after 2011 to debt finance expected capital expenditures. The bonds are anticipated to be issued with a 30-year bullet maturity.

The 2010 first mortgage bonds represent a secured debt obligation of Tri-State, on parity with Tri-State other secured obligations (including pollution control revenue bonds, RUS debt and the secured credit facility). Tri-State's obligation to pay debt service on these securities is supported by a master first mortgage indenture, deed of trust and security agreement, which pledges substantially all property of Tri-State as collateral to ensure payment of secured obligations. The master first mortgage indenture was last amended, restated and supplemented as of June 8, 2010.

The 'A-' 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 Springerville #3 collateral pledge, not a pledge of all Tri-State's physical assets).

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]) and equity capitalization (23%) at fiscal year end 2009) at or above 'A' rating category medians.
--On a consolidated basis, Tri-State's members have maintained stable financial performance for the past five years, with equity-to-total capitalization in excess of 40%, which is typical for power purchasing electric distribution systems.
--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 costs), currently at 6.5 cents per kilowatt-hour (kWh). While the wholesale rate remains competitive for the Rocky Mountain region, some members' delivered retail rates are relatively high for the region.
--Tri-State has scaled down its five-year capital expenditure program (down to $1.2 billion from $2.5 billion in the prior year's projection), due to the continued delay in attaining permits for the construction of the Holcomb Generating Unit #3. Tri-State's delayed investment in Holcomb has the net effect of improving Tri-State's balance sheet and leverage projected through 2014.
--Positively, the majority of capital investments through 2014 are transmission related (generally less risky investment than generation).
--While the economic recession has slowed the rate of sales growth for Tri-State's members, it has also favorably postponed the need for additional baseload generation beyond 2016.

KEY RATING DRIVERS:

--Key to maintaining Tri-State's solid ratings is its governing Board's willingness to continue to pass through rate increases to maintain the stronger financial goals established for Tri-State through this period of sizeable 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 a lawsuit brought by five members contesting the application of the 'postage stamp' average wholesale power rate could negatively impact Tri-State as it could set a precedent for challenging the cooperative's structure and the contracts in place. The five members comprise less than 3.5% of Tri-State's member sales in 2009.

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.

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 1.5 million. Tri-State's annual revenues for fiscal year 2009 totaled $1.2 billion.

The members' retail customer base is adequately diversified, with residential, industrial, commercial, irrigation and other users accounting for 31%, 34%, 22%, 8% and 5%, respectively, for 2009. The vast majority of operating revenues are derived from sales to member systems (roughly 80% in 2009), and the rest is attributable to non-member, mostly contracted sales (i.e., with Public Service Co. of Colorado, Salt River Project and Shell Energy).
Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (Aug. 16, 2010);
--'Public Power Rating Guidelines' (June 11, 2009).

Applicable Criteria and Related Research:
Public Power Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=447150
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606

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