Fitch Revises Tri-State Generation & Transmission's (CO) Outlook to Negative

NEW YORK--()--Fitch Ratings has assigned 'A' ratings to the following bonds and notes for Tri-State Generation and Transmission Association, Inc. (Tri-State)

--$750 million first mortgage bonds, series 2014 E and F;

--$500 million first mortgage notes, series 2014 B.

The first mortgage notes are expected to be privately placed around the mid-October and the FMB are expected to price shortly thereafter.

In addition, Fitch affirms the following ratings:

--$500 million first mortgage bonds 2010A (144A securities) at 'A';

--$15.8 million Gallup County, NM secured pollution control revenue bonds, series 2005 at 'A';

Fitch has also revised Tri-State's Rating Outlook to Negative from Stable.

SECURITY

All of the FMB and FMN will be issued under a Master First Mortgage Indenture, Deed of Trust and Security Agreement dated effective as of December 15, 1999 and secured on parity with existing and future senior secured debt by a lien on substantially all of Tri-State's tangible assets and revenues, except for certain limited exceptions.

KEY RATING DRIVERS

OUTLOOK REVISED TO NEGATIVE FROM STABLE: The Outlook revision reflects Fitch's view that a recent decline in financial results, increased concerns about Tri-State's ability to pass along costs to its members and a sizeable capital program have weakened the overall credit quality of this utility system. Efforts are underway, including a major debt refinancing, which should stabilize financial metrics and reduce member rate requirements over the near term. Fitch will closely monitor the impact these have on Tri-State and its members.

LARGE GENERATION AND TRANSMISSION COOPERATIVE: Tri-State provides wholesale electricity to 44 member distribution cooperatives across four states (CO, WY, NM, NE). The service area is diverse economically and geographically. Credit quality is supported through an all-requirements power sales contract with 42 of the 44 members through 2050 and the remaining two members through 2040.

MEMBERS' REGULATORY ISSUES: Tri-State, which is self-regulated, has incurred push back from certain of its state- regulated members and their largest customers regarding proposed changes to the members' rate design. Management is working to resolve these issues, but final resolution will likely take time and could influence G&T policies.

MAJOR DEBT REFINANCING: Tri-State is in the process of refinancing up to $1.6 billion of its outstanding secured debt to extend the maturity of its bonds to better match the useful life of its assets and provide greater flexibility. The refinancing has the potential to smooth out debt service, improve cash flow and lessen the amount of rate increases near term. Tri-State's reliance on Rural Utilities Services (RUS) borrowings will end after the refinancing.

SIZEABLE CAPITAL PROGRAM: The five year capital plan (2014-2018) totals a substantial $1.8 billion, with over one-half of the spending being used for transmission projects. As a largely coal-based system, a meaningful amount of expenditures will also be used for environmental improvements and for upgrades to electric plant and equipment. The proposed refinancing should allow 50% of this capital program to be funded with internal cash flow.

RATING SENSITIVITIES

SUSTAINED RATE PRESSURE: Sustained rate pressures that produce a continued trend of subpar financial metrics would likely result in a downward rating adjustment to 'A-'. Improvement in debt service coverage and leverage metrics to historical levels would likely stabilize the Outlook.

UNFAVORABLE STATE REGULATORY ACTIONS: Future state regulatory decisions or court rulings that negatively impact Tri-State or its members could result in downward rating pressure.

CREDIT PROFILE

Tri-State is a taxable, not-for-profit wholesale power supply cooperative providing power to 44 rural member distribution cooperatives and public power districts in four states: CO (18 members), Wyoming (eight), Nebraska (six), 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. In 2013, the G&T sold 15.3 million megawatt-hours (MWH) to its members and 3.3 million (MWH) to non-members. Total revenue from electric sales was $1.3 billion for 2013, with non-member sales totaling $172 million.

While Tri-State's average wholesale power supply cost is still in line with the region, members' average retail rates were somewhat high, at an average of 10.25 cents per kilowatt-hour (KWH) for 2012, compared with average retail rates for the surrounding member region.

Following no rate increases in 2010 and 2011, rates were increased 4.8% in 2012 and 4.9% in 2013. This raised wholesale rates to approximately 7.10 cents per KWH in 2013. The wholesale rate is expected to rise to around 8.66 cents per KWH by 2017. Given Tri-State's large capital plan, the cooperative had expected additional annual rate increases approximating 5% to 6% a year for the period 2014-2018. However, with the proposed debt refinancing, rate increases over the next several years may be more modest or nonexistent in some years. Longer-term, additional wholesale rate increases will still be required.

The Tri-State board previously established certain financial policies designed to set rates to achieve a debt service ratio of at least 115.5% in 2014, with an annual increase of 1/2 % until 120 % is reached in 2023. Based on Tri-State calculations per the Master Indenture, the debt service ratio was 146% in 2013. However, based on Fitch's calculations, DSC was meaningfully lower, closer to the 1.00x level over the past three years, and down from 1.22x in 2009.

In the future, Tri-State believes that with the proposed debt refinancing, consolidation of operations, elimination of cushion of credit funding and less revenue deferrals, the differences in coverage ratios between Tri-State and Fitch are likely to be less significant and potentially more robust.

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

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);

--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

U.S. Public Power Peer Study Addendum - June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=873874

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
Alan Spen
Senior Director
+1-212-908-0594
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Lina Santoro
Senior Director
+1-212-908-0522
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alan Spen
Senior Director
+1-212-908-0594
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Lina Santoro
Senior Director
+1-212-908-0522
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com