Fitch Rates Tri-State (CO)'s CP Program 'F1'; Affirms Obligations at 'A/A-'; Outlook to Stable

NEW YORK--()--Fitch Ratings has assigned an 'F1' rating to Tri-State Generation & Transmission Association, Inc.'s ('Tri-State' or 'cooperative') new $500 million maximum commercial paper (CP) program. Tri-State expects to privately place the initial CP notes in 2Q2016.

In addition, Fitch has affirmed Tri-State's long-term obligations as follows:

--$1.75 billion first mortgage bonds (FMB) series 2010A, 2014 B and 2014E at 'A';

--$10.8 million Gallup County (NM) secured pollution control revenue bonds (PCRB) series 2005 at 'A';

--$495.0 million Springerville pass-through certificates series 2003A and 2003B at 'A-'.

The Rating Outlook has been revised to Stable from Negative.

SECURITY

Tri-State's senior secured obligations, which include the FMB and PCRBs, are secured by a lien on substantially all of Tri-State's tangible assets and revenues, except for certain limited exceptions. The Springerville lease debt is secured by a lien solely on the Springerville Unit 3 generating facility and associated lease revenues. The CP notes will be unsecured obligations of the cooperative.

KEY RATING DRIVERS

STRONG LONG-TERM RATING AND LIQUIDITY: Tri-State's 'A' Long-Term credit rating and varied sources of liquidity support the 'F1' rating on its CP program. Total internal and external liquidity sources provide coverage of maximum potential requirements that are in excess of Fitch's target for 'F1' Short-Term ratings.

SOUND LONG-TERM CHARACTERISTICS: Tri-State is one of the largest generation and transmission cooperatives in the U.S., providing competitive cost wholesale electricity to 44 member distribution systems across four western states. The service area is diverse geographically and economically. Credit quality is supported by all-requirements power sales contracts with its members, the majority of which extend through 2050.

OUTLOOK REVISED TO STABLE: The Outlook revision to Stable reflects Tri-State's improved fiscal 2015 financial results coupled with favorably resolved member wholesale rate issues, which together should stabilize the overall credit quality of the cooperative relative to its 'A' rated peers. Debt service coverage for all obligations rose to 1.31x for fiscal 2015. Equity to total capitalization is solid at 24%.

MAJOR DEBT REFINANCING: Tri-State refinanced more than half of its outstanding secured debt ($1.59 billion) in 2014, extending the maturity of its bonds to better match the useful life of its assets and provide greater financial flexibility. The debt restructuring lowered annual debt service, boosted financial protection metrics and reduced member rate requirements over the five-year forecast.

RESOLVED RATE CHALLENGES: Tri-State has been under rate pressure stemming from member legal and state regulatory challenges to Tri-State's proposed rate adjustments since 2012. In certain cases, the dispute resulted in temporary suspension of Tri-State's rate adjustment, tightening financial coverages. Positively, Tri-State implemented a new wholesale rate design in January 2016, with a moderate rate increase. The new rate was unanimously approved by the board and outstanding member rate challenges were resolved or dismissed.

RATING SENSITIVITIES

MAINTENANCE OF IMPROVED FINANCIAL METRICS: The sustained ability of Tri-State Generation & Transmission Association to adequately adjust wholesale rates to maintain solid projected financial performance is a key credit factor supporting its current rating. Failure to do so could result in negative rating pressure.

RATING STABILITY: The strength and stability of Tri-State's long-term credit rating, coupled with its healthy liquid resources, should continue to support the 'F1' rating on the cooperative's commercial paper program.

CREDIT PROFILE

Tri-State is a taxable, not-for-profit wholesale power supply cooperative providing power to 44 member systems, of which, 40 are rural electric distribution cooperatives and the remaining four are public power districts. Tri-State's members are located in four states: Colorado (18 members), Wyoming (8), Nebraska (6), and New Mexico (12). The member systems provide retail electric service to approximately 626,000 users, or a population base of about 1.5 million. In 2015, the G&T sold 15.8 million megawatt-hours (MWH) to its members and 2.0 million MWH to non-members. Member revenues accounted for 90% of Tri-State's 2015 revenues from electric sales. Long-term wholesale electric service contracts obligate each member to purchase at least 95% of its power requirements from Tri-State.

NEW COMMERCIAL PAPER PROGRAM

Tri-State is establishing a CP program with a maximum authorization of $500 million, and maximum maturity of 397 days. The CP notes are primarily supported by high-quality, highly liquid assets in the form of cash and investments, and access to the cooperative's $750 million secured revolving credit facility. The credit facility can be used for general corporate purposes, issuing letters of credit and backing up the CP. Under the 2011 credit agreement, borrowings under the credit facility are secured, pari passu to senior obligations, as per the master indenture. The credit facility has a current expiration date of July 26, 2019.

Tri-State maintains a diverse group of eight banks participating in the revolving credit facility, each with Short Term 'F1' ratings or higher. As of Dec. 31, 2015, Tri-State had $271 million in borrowings outstanding under the credit facility. The cooperative anticipates refinancing the majority of the borrowings long term in 2016. Tri-States estimates an average of $100 - $300 million in CP outstanding on an annual basis, primarily to interim finance capital expenditures. As per the CP resolution -- anticipated to be approved by the Board on May 11th -- Tri-State's outstanding CP will be limited to the lesser of: (a) the available liquidity under the credit facility; or (b) the maximum CP backup permitted as per the credit facility (currently $500 million).

As of Dec. 31, 2015, total available liquid resources divided by total maximum potential liquidity requirements is solid at 1.33x, and in excess of the 1.10x coverage required for a Short Term 'F1' rating. The rating for Tri-State's CP notes appropriately maps to the Long-Term Issuer Default Rating (IDR) of 'A'.

Tri-State has outlined reasonable CP settlement procedures. Based on the procedures plan, needed fund transfers -- whether to issue CP, provide contingency reserves in a failed remarketing, or prepay outstanding CP -- should be received in a timely manner by Tri-State and the Issuing and Paying Agent (MUFG Union Bank).

SOLID LIQUIDITY

As of Dec. 31, 2015, Tri-State's unrestricted cash and investments totaled $144.6 million or the equivalent of 53 days cash on hand, which is below Fitch's 'A' rated peer median of 96 days (June 2015). Incorporating $432 million in available external liquidity under the revolving credit facility, Tri-State's days liquidity on hand is a solid 227 days -- more in-line with their peers. Liquidity is projected to remain sound through the forecast period, as Tri-State's cash flow is expected to improve. A portion of the credit facility, $47.7 million, is a letter of credit supporting variable rate pollution control bonds issued by Moffat County.

SOUND FINANCIAL OUTLOOK

Tri-State restructured $1.59 billion or roughly half of its outstanding secured obligations in 2014, eliminating RUS borrowings. The refinancing was designed to smooth out debt amortization, in particular front-end loaded bullet maturities, and better align long-term asset life with associated debt obligations.

The restructuring extended the final maturity on Tri-State's debt from 2047 to 2049, and reduced annual debt service by roughly $90 million in fiscal 2015. This significant cost savings coupled with the wholesale rate resolution, and new rate implementation in early 2016 has positioned Tri-State for more solid financial performance through 2020. DSC for all obligations solidly improved to 1.31x in fiscal 2015, from 0.94x in fiscal 2014 (excluding deferred revenue).

Prospectively, taking into account reasonable sales growth averaging 1.7% per year, more moderate wholesale rate increases, and sizeable capital expenditures totaling $1.4 billion, Tri State's DSC coverage should approximate 1.40x, or 1.25x after transfers -- sound for the rating category. The capital program is considerable, with large transmission and environmental related expenditures. However, Tri-State is projecting to internally fund approximately 35% - 40% of the capital plan, keeping equity to total capitalization solid throughout the forecast period.

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

Applicable Criteria

Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004051

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004051

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Lina Santoro
Analytical Consultant
+1-212-908-0522
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Matthew Reilly
Director
+1-415-732-7572
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Lina Santoro
Analytical Consultant
+1-212-908-0522
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Matthew Reilly
Director
+1-415-732-7572
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com