Fitch Ratings Downgrades Grand River Dam Authority.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 21, 2002

Fitch Ratings downgrades Grand River Dam Authority's (GRDA) $770 million in outstanding electric revenue bonds to 'A-' from 'A'. The 'A-' rating extends to GRDA's planned issue of $86 million in current interest bonds (CIBS) and $23 million in capital appreciation bonds (CABS). The bond issue, originally set to price in late February 2002, is currently on hold due to market conditions. The bonds are expected to be insured by FSA with Lehman Brothers as lead manager.

The downgrade reflects increased concern over GRDA's (the authority) flexibility to increase electric rates to its customers without triggering reopeners in certain contracts. Despite previous indications from management to the contrary, support by native-load customers for the authority's recently proposed 4.75% rate increase appears lacking. Certain customers have expressed that in the event of a rate increase, they would consider looking for alternative sources of power supply, which they have the option to do under their contracts. While GRDA remains a low-cost provider in the region even with the proposed rate increase, the threat that members may leave the system leads Fitch to conclude that the rate increase will not occur and that GRDA's rate flexibility is more limited than previously thought. Without the rate increase, GRDA's projected debt service coverage ratios are lower than first expected, ranging from 1.06 times (x) to 1.11x through 2006, compared to 1.15x-1.21x in earlier forecasts.

The underpinnings of the 'A-' rating are GRDA's low-cost sources of power, a diversified customer base, and the short life of its debt. GRDA benefits from its inexpensive power supply with wholesale rates averaging about 3.5 cents per kilowatt-hour (kwh) in 2001. In addition, GRDA recently signed a new agreement with Coffeyville, KS, making it a member system through 2006, and has extended a contract with Stillwater, OK, its largest in-state municipal customer, through 2011. The authority expects to retire all its debt by 2014. Primary credit concerns include power sales contracts that expire prior to debt maturity, thin operating margins, and below-average debt service coverage ratios. While debt service coverage levels are relatively weak, GRDA has ample unencumbered cash reserves (around $80 million) and the authority has minimal capital needs after major maintenance and capital improvements are completed on the hydroelectric facilities.

GRDA is a wholesale electric provider that supplies a diverse customer base, including electric cooperatives, municipalities, industrial customers, and off-system purchasers. GRDA operates two coal-fired units, GRDA 1 (100% owned) and GRDA 2 (62% owned), with a net generation capability of 812 megawatts (MW), in addition to owning several hydroelectric projects (bringing total capacity to 1,298 MW), and transmission facilities.