Fitch Lowers Lower Colorado River Authority -- TX -- to 'A+'; Rates $105MM Rfdg Revs 2004 'A+'.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 17, 2004

Fitch Ratings assigns an 'A+' rating to Lower Colorado River Authority, TX's (LCRA) $105 million refunding revenue bonds, series 2004 and $10 million of revenue bonds series 2004A, 2004B and 2004C. In addition Fitch has downgraded LCRA's outstanding $1.5 billion of revenue bonds to 'A+' from 'AA-' and affirmed the 'F1+' rating on the $350 million tax-exempt and $350 million taxable commercial paper (CP) programs. The rating action has no impact on the 'A' rating of LCRA's affiliate LCRA Transmission Service Corp. (TSCorp). The Rating Outlook is Stable.

Proceeds from the 2004 bonds will refund certain outstanding commercial paper used to purchase Calpine Corp.'s one-half interest of the Lost Pines power project, a 500 mw operating combined cycle power plant. As a result LCRA's affiliate GenTex now owns 100% of the unit. This acquisition is a slight acceleration of LCRA's power resource plan to meet its members' growing power needs in 2006-2007. Proceeds from the 2004 A, B and C bonds will be used to fund certain water system upgrades. The bonds are expected price the week of March 22, 2004 on a competitive basis.

The rating downgrade reflects increasing uncertainty in the fundamental credit dynamics of LCRA due to an increasing amount of wholesale power revenue bonds maturing beyond the final expiration date (2016) of the members' wholesale power agreements (WPA), to around 25% of power bonds - including this financing. The rating change also takes into account, a five year capital improvement plan which anticipates additional power system debt for existing facilities with the debt extending beyond the WPAs, and other uncertainties. Also, a recent action taken by three member systems to cap their LCRA power requirements, and not participate in the costs or benefits associated with the new generation is an indication of diversifying member strategies, adding a new level of complexity to LCRA's power resource planning. Two of the members capping their loads filed a suit against LCRA seeking a declaratory judgment to determine the proper calculation of their capped loads, but this is not expected to affect LCRA's ability to recover its fixed costs under the WPA. Fitch will continue to monitor this issue.

The strong overall rating of 'A+' continues to take into account LCRA's cost competitiveness in the ERCOT power market, the members growing power needs, and the belief that the members, in general, see value in continuing their long standing relationship with LCRA. While the members must decide whether to extend their WPA's by June 25, 2011, management is starting this dialogue early in preparation of future power resource needs. LCRA anticipates that the members will need additional 250 to 500 mw of base load generation by the years 2010-2012, and has stated that it will not commit to securing such a resource without long term contracts in place. Additionally, management continues to expect future growth in its water and electric transmission business via partnerships, acquisitions, and alliances with additions to the water and wastewater systems financed with LRCA debt, and transmission additions funded through LCRA's affiliate TSCorp.

Other fundamental credit characteristics of LCRA include historically solid financial performance with financial results for fiscal year 2003 showing solid debt service coverage of about 1.43 times (x), equity at above 28% and sufficient cash on hand to fund 95 days of operating expenses. Pro-forma financial performance is expected to return to historical levels with debt service coverage of 1.3 to 1.4x (coverage for the twelve months ended December 2003 was 1.54x).

Additional credit concerns include competitive pressures within Texas, and deregulation of the Texas retail electric market. While municipal and cooperative utilities have the ability to opt into retail competition, Fitch believes that they will continue to remain out in the near to medium term. This is primarily a factor of: uncertainties associated with competition (once you opt in you can't opt-out); added costs of upgrading billing and IT systems to comply with ERCOT systems (a large expense for small to medium sized distribution systems); and the apparent benefits of competition are skewed toward large commercial and industrial customers (LCRA members retail customers are 59% residential and 41% small commercial/industrial). Over the long term Fitch's analysis takes into account that LCRA's wholesale electric customers may offer retail choice, which under the current contracts could affect LCRA's energy sales to these customers. Based on our analysis of LCRA's very competitive and diverse power resources, Fitch believes that members opting into competition should not have a material effect on LCRA's financial performance.

LCRA is the largest public power wholesale provider in Texas serving eight electric cooperatives, 33 cities, and one investor-owned utility (IOU). The utility also provides regional water and wastewater services in its service area, and manages water supplies and controls flooding along the Colorado River of Texas. LCRA manages its operations through four business units: Wholesale Power Services, Transmission Services, Water Services, and Community Services. Wholesale Power Services accounts for about 91% of operating revenues, followed by Water Services at 7%, and transmission support services at 2%. Revenues originally associated with transmission have been shifted from LCRA to its affiliate TSCorp, a nonprofit corporation. TSCorp was formed to separate LCRA's transmission business from electric generation as required under the Texas electricity restructuring legislation (Senate Bill 7), and allow LCRA to provide transmission services throughout Texas, for LCRA and other contracted entities.