Fitch Rates Tri-State G&T's $740MM Lease Obligation 'A-'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 6, 2003

Fitch Ratings has assigned an 'A-' rating to $740 million 2003 pass-through certificates, series A and B, expected to be issued by two pass-through trusts for the benefit of Tri-State Generation and Transmission Association (Tri-State). The certificates' rating is based on the underlying senior unsecured rating of Tri-State pursuant to a leasing agreement between Tri-State (the lessee) and a Delaware limited liability company (representing the owner lessors). The certificate proceeds will be loaned to the owner lessors via 'lessor notes' and, along with privately provided equity (20% of total project cost or approximately $185 million), will fully fund the construction of a 400 MW, coal-fired generating unit at an existing site in Springerville, Arizona. Tri-State is leasing 100% of the facility for a 34-year period, and according to the leasing agreement is obligated to make rental payments (sufficient to meet debt service requirements) on the lessor notes as an operating expense of Tri-State.

The certificates are directly secured by a lien on and first priority interest in the Springerville facility, the site, and virtually all operative documents. Additionally, Tri-State has $1.45 billion of senior secured debt outstanding, of which, $77 million is publicly held secured pollution control bonds (issued by Moffat County and the City of Gallup), rated 'A' by Fitch. The Rating Outlook is Stable. The certificates are scheduled to price the week of Oct. 13, with Credit Suisse First Boston as sole underwriter.

While the rental payments on the certificates are paid ahead of Tri-State's own debt service along with other operating expenses, the lease obligation is rated a notch below the cooperative's senior secured rating due to several factors: (a) as an executory contract Tri-State may reject the operating lease in the event of a Tri-State bankruptcy, resulting in a damages claim equal in rank to Tri-State's other general unsecured creditors; (b) during the construction period (2003-2006), should Tri-State experience an event of default, then the cooperative's obligation to meet project costs may be reduced to 89.95% if the default is deemed a 'partial recourse event'; and (c) the plant operator and purchaser of 100 MW of the project's output under a five year contract is Tucson Electric Power Company (TECP), an entity rated below investment grade by Fitch.

The contractual structure of the transaction includes Tri-State entering into a 100 MW, 30-year power sales agreement with Salt River Project (shadow rating of 'AA' by Fitch), and a 100 MW 5-year power sales and put arrangement with TEPC. Tri-State will retain the remaining 200 MW of plant capacity to meet its native load requirements, and expects to utilize the 100MW of TECP's portion of the output for its own customers beginning in 2011. The cost of the new generating facility, including interest during construction, financing and legal expenses, and improvements to existing generating units at the site, is estimated at $925 million. The facility is expected to help Tri-State satisfy its members' power requirements particularly in southwest Colorado and New Mexico, where it has relied on power purchases since its merger with Plains Electric in 2000.

In 2002, Tri-State's power purchases met approximately 25% of total energy requirements via long-term contracts (with WAPA and Basin Electric Cooperative), and 10% via spot purchases. Springerville Unit 3 should help mitigate Tri-State's spot market power purchases in the future. In addition, Fitch expects that Springerville Unit 3 should remain a key component in Tri-State's resource mix given: (a) Tri-State's increasingly short power position with its members, (b) Tri-State's experience with the technology and fuel procurement for coal-fired power generation, and (c) the availability of transmission to wheel the power to its members.

Tri-State's credit strength stems from its competitive average wholesale rate (3.9 cents per kwh for 2002 including transmission), solid financial performance, a fiscally prudent Board and management team, and a growing, geographically and economically diverse customer base across four states. Credit weaknesses center on tightening projected financial protection measures, moderate industrial revenue concentration among its members' retail customers, and the pressure to continue to meet its members' growing power needs on a cost effective basis.

Projected balance sheet and financial performance ratios are somewhat below historic levels. Tri-State plans to mitigate these risks by reducing patronage capital refunds in order to rebuild system equity from 12% in 2003 to a more solid 25% by 2010. Tri-State has available liquidity totaling $180 million in cash unused lines of credit, plus $300 million in approved, but undrawn, funds for capital projects. Tri-State's average wholesale rate will rise with the addition of the Springerville Unit 3, although based on reasonable assumptions regarding load growth, fuel prices, and power market prices, should remain competitive at less than 4.6 cents per kwh by 2012. Even under Fitch stress scenarios assuming reduced load growth, lower market power prices and higher fuel prices, the average wholesale rate did not exceed 5.0 cents per kwh through 2012. Under these scenarios, the lease would be a competitive source of energy for Tri-States's members when market prices for natural gas are at or above Fitch's base case forecast of $3.00 to $3.50 per mmBTU, but could become uneconomic in the unlikely event natural gas prices fall significantly below that level for a sustained period.

Tri-State is a taxable, not-for-profit wholesale electric generation and transmission cooperative providing service to 44 member distribution system cooperatives in four states: Colorado, Wyoming, New Mexico, and Nebraska. The member systems serve a population of approximately 1 million predominantly residential, agricultural and small commercial users. Wholesale power contracts require each member to purchase at least 95% of its requirements from Tri-State through 2040. Tri-State has its own rate-setting ability, but certain of the members are regulated by state utilities commissions.