Fitch Rates LCRA's Trans Service Corp.'s $121MM Bonds 'A'.

NEW YORK -- Fitch Ratings assigns an 'A' rating to Lower Colorado River Authority Transmission Services Corporation's (TSCorp) $121 million transmission contract refunding revenue bonds (LCRA Transmission Services Corporation Project), series 2004. The Rating Outlook is Stable. Fitch also affirms the $561 million of TSCorp's outstanding contract revenue bonds. Proceeds of the series 2004 bonds will refinance TSCorp's outstanding tax-exempt commercial paper. The bonds are expected to price the week of Nov. 22, 2004 with Bear Stearns as senior manager.

The 'A' rating reflects the essentiality of the service it provides and the reduced business risks involved with transmission assets (especially relative to electricity generation). TSCorp's business model focuses on developing transmission projects across Texas currently recommended by the Electric Reliability Council of Texas (ERCOT) that have or will receive a certificate of convenience and necessity (CCN) from the Public Utility Commission of Texas (PUCT) prior to construction. Additional strengths include TSCorp's experienced management team with a proven history of developing transmission facilities in Texas, the predictability of transmission service operating costs and good cash reserves. Fiscal year (FY) 2004 financials show debt service coverage of 1.4 times (x) and cash reserves equal to six months of operating expenses.

Credit risks include TSCorp's large capital improvement plan (nearly $600 million over the next three years), the short operating history, and regulatory risk concerning how the PUCT will respond to TSCorp's ongoing rate case filings. Partially mitigating this concern is TSCorp's liquidity position and its ability to appeal PUCT rate cases. Moreover, in the event a PUCT rate decision were to be well below TSCorp expectations, management would consider discontinuing future transmission projects if they could not reasonably expect to recover costs and earn margins sufficient to provide debt service coverage of 1.50x.

Although TSCorp received a favorable decision by the PUCT in its first transmission rate case in December 2002, TSCorp's 2003-04 rate filing was challenged by various parties. TSCorp proposed changing its rate methodology from a debt service coverage approach to a cash flow approach, which would have resulted in an 80% increase in revenue requirements. As a result of a contested hearing on TSCorp's rate case, a Proposal for Decision ('PFD') was rendered by a judge that outlined several recommendations for TSCorp to the PUCT. Among the recommendations was a return to the original debt service coverage approach and an independent review of management and accounting practices. While the PUCT has not made the final decision on these matters, Fitch takes comfort from the PUCT approving interim rates for TSCorp that will produce TSCorp's target of 1.5x debt service. Fitch believes the PUCT's final decision on TSCorp's rate filing and the PFD's recommendations will not have a material effect on TSCorp's financial position.

It is also important to note that, while viewed unlikely, LCRA has the ability to issue debt secured by TSCorp's contractual commitment to LCRA, and draw excess revenues back to LCRA. These features structurally subordinate TSCorp's debt service on contract revenue bonds below that of LCRA.

TSCorp is a Lower Colorado River Authority (LCRA) transmission system affiliate and non-profit corporation. Fitch Ratings views TSCorp as being ultimately controlled and operated by LCRA (Fitch rates LCRA 'A+'). 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. Transmission rates within ERCOT are 100% 'postage stamp,' determined by spreading the total cost of electric transmission service in ERCOT among all distribution service providers (DSP) according to their electric loads. All Transmission Service Providers (TSPs), including TSCorp, receive their compensation from all the DSPs in ERCOT.