May 17, 2016 - 5:03 PM EDT
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Fitch Rates Tri-State, CO's $250MM Series 2016A FMBs 'A'; Outlook Stable

Fitch Ratings has assigned an 'A' rating to Tri-State Generation & Transmission Association, Inc.'s (Tri-State or cooperative) series 2016A $250 million first mortgage bonds (FMBs), due 2046.

Bond proceeds will refinance a portion of outstanding borrowings under Tri-State's revolving credit facility that had been drawn to finance capital expenditures. The taxable 2016A bonds are registered securities under the Securities Act 144A rules.

The Rating Outlook is Stable.

SECURITY

Tri-State's senior secured obligations, which include the 2016A bonds, are secured by a lien on substantially all of Tri-State's tangible assets and revenues, except for certain limited exceptions.

KEY RATING DRIVERS

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.

IMPROVED FINANCIAL RESULTS: Tri-State's Stable Rating Outlook reflects the cooperative's improved fiscal 2015 financial results coupled with favorably resolved member wholesale rate issues. 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.

MEMBER CREDIT QUALITY: Tri-State's credit quality is ultimately driven by the sound credit strength of its member distribution systems. A material change in member credit quality could affect the agency's rating.

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 (63% of Tri-State's member sales), Wyoming (13%), Nebraska (4%), and New Mexico (20%). 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. Member energy sales continued to grow and climbed by 2.38% in fiscal 2015.

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.

Additionally, on a consolidated basis, the financial metrics of the member distribution systems have exhibited stable financial performance. Equity as a percentage of total assets was in excess of 46% as of fiscal year end 2014, typical of power purchasing electric distribution systems. Operating margins are sound and consistent, at $123.7 million and $124.6 million, respectively, for fiscal 2013 and 2014.

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 -- 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.

POWER SUPPLY STRATEGY

Tri-State has considerable coal-fired generation in its power supply portfolio, similar to its peers in the Rocky Mountain region. Favorably, Tri-State has been diversifying its power supply over the past decade, adding natural gas-fired generation and varied renewable resources. Tri-State's reliance on coal-fired generation has notably declined to 59% of energy requirements for 2015, which is in-line or better than its neighboring utilities, but still considerable.

Tri-State is projecting to reduce its carbon footprint roughly 25% by 2020, via the addition of renewables and maintenance of highly efficient power plants. While this level of carbon reduction is substantial, regulatory restrictions could require further reductions beyond 2020 that may be costly. Tri-State's coal facilities are otherwise environmentally compliant, cost competitive and among the more reliable plants in the region. Tri-State does not require added baseload generation until post-2020.

For additional information please see Fitch's release dated May 5, 2016.

Relevant Rating Committee Date: May 4, 2016

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

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004643

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.

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


Source: Business Wire (May 17, 2016 - 5:03 PM EDT)

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