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Fitch Rates Colorado Springs Utilities, CO's 2010D1-4 Utilities System Revs 'AA'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns an 'AA' rating to the following Colorado Springs (CSU, Colorado Springs), CO's utilities system revenue bonds:

--$47 million, series 2010D-1 tax exempt;

--$65 million, series 2010D-2 tax exempt/private activity (interest subject to federal taxation under certain circumstances);

--$49 million, series 2010D-3 taxable;

--$110 million, series 2010D-4 taxable, direct pay Build America Bonds(BABs).

The 2010D bond proceeds will finance CSU's planned acquisition of the remaining interest (49.9%) in the Front Range Power L.L.C. (FRP) which is not already owned by CSU. The FRP consists of a 480 megawatt (MW), natural gas-fired combined cycle generation facility. The 2010 bonds are secured by a net revenue pledge on parity with outstanding ($2 billion) subordinate lien obligations. CSU's sole operating lien is the subordinate lien, as the senior lien is closed (no debt outstanding under the senior lien). The 2010D bonds are expected to price via negotiated sale the week of Dec. 13, 2010.

In addition, Fitch affirms all outstanding CSU utility system revenue/refunding and improvement system revenue bonds at 'AA', which are on parity with the 2010D 1-4 bonds.

The Rating Outlook on all bonds is Stable.

SECURITY:

The bonds are secured by a net revenue pledge (after payment of operating and maintenance expenses) of the combined utilities system and are on parity with outstanding utility system revenue bonds. Net revenues include any income received from the U.S. federal government in connection to Colorado Springs' issuance of BABs.

RATING RATIONALE

--CSU's strong credit rating reflects the diverse revenue stream of the combined utility system, with four major utility components (electric, natural gas, water, and wastewater); each of which are self-supporting systems.

--Colorado Springs has a history of maintaining very competitive retail electric and combined utility bills for the region, while maintaining rate flexibility to achieve timely cost recovery.

--Financial performance has remained solid for the rating category through fiscal year end 2009, but challenges remain, including the funding of a large $1.6 billion five-year capital program. CSU also faces ongoing, albeit moderate, financial impacts of the economic recession in the form of lower sales and development fees.

--Colorado Springs benefits from a fairly diversified customer base and an area economy supported by a relatively stable to growing U.S. military presence.

--CSU's decision to take full ownership interest in FRP (CSU current equity share in FRP is 50%) is a net credit positive as it is projected to generate $11-$16 million in annual cost savings for CSU by displacing more costly power purchases from FRP with relatively low cost acquisition financing. FRP also helps to diversify CSU's power resource mix. The earliest the FRP acquisition, if successful, could be completed is year end 2010.

--The electric system, the largest of the combined utilities' systems, maintains a relatively low-cost power resource mix, with no new base load generation needed until 2016 at the earliest.

--CSU's internal liquidity has declined, however, over the past few years as fuel and interest rate volatility impacted financial derivatives resulting in CSU having to post collateral ($55 million posted as of Nov. 30, 2010).

--CSU also has an above average variable-rate debt to total debt ratio of 40% (as of Sept. 30, 2010) compared to other municipal utilities. Of this amount, a modest 7% is unhedged. CSU's debt portfolio and renewal/refunding exposure related to expiring liquidity facilities requires ongoing management oversight.

--Colorado Springs maintains a very modest transfer to the city's general fund, averaging approximately 3.5% of total operating revenues over the past three years.

--Positively, Amendments 60 and 61, which had proposed imposing property tax payments for all utilities in Colorado and proposed limitations on local debt issuance, both failed to garner adequate voter support in the November elections.

KEY RATING DRIVERS

--Continued willingness of the City Council to raise rates as needed to maintain CSU's financial performance metrics in line with 'AA' rating category medians, particularly during this period of economic recession and planned large capital program.

--Execution of the large $1.6 billion capital program, which is projected to increase the combined typical residential bill by an average of 6% (excluding fuel) in each of the next 10 years.

--While not unique to Colorado Springs, its exposure to coal-fired generation (accounting for 75% of energy mix) could result in increased costs in the long term pending state/federal carbon emission and climate change legislation. Fitch will monitor the potential impact of carbon reduction legislation on CSU's financial and credit profile as policies and regulations are formulated and enacted.

CREDIT SUMMARY:

CSU is a combined utility system serving customers in the city of Colorado Springs and surrounding suburban communities. The combined utilities system serves a population base of approximately 400,400 in the south central Front Range area of Colorado. The city owns and operates CSU, which includes a water and wastewater system, an electric light and power system (vertically integrated), a natural gas distribution system, street lighting, and other minor systems. Colorado Springs' total operating revenues by service, for fiscal year end 2009 (aggregate of $743.8 million) consisted of: 44.7% electric, 32.6% natural gas, 13.6% water, 8.8% wastewater, and 0.3% other. The combined utilities system is owned by the city of Colorado Springs and operates as an enterprise fund of the city.

To supplement and back up Colorado Springs' current water resources, the city has been planning the construction of the Southern Delivery System (SDS) raw water delivery system from the Pueblo Reservoir (federally owned facility) since 1996. Colorado Springs will be the majority owner in the SDS project (95.3% share ownership), with neighboring water systems owning the remaining share of the project. The SDS project is challenging and highly political at the state, regional, and federal levels. Favorably, key major permits are now in place and SDS construction began late in 2010. Once SDS is completed, Colorado Springs' water supply would be adequate through 2040. Given that rate increases are critical to SDS construction and CSU maintaining its current rating, management has been proactive in ensuring city council and the public are cognizant of the need for rate increases to fund such a large project. As a testament to the support CSU has established, the City Council recently approved 12% rate increases on water services for 2011 and 2012.

With respect to the electric system, this past summer CSU submitted a written notice of its intent to exercise its option to purchase the remaining interest in the FRP from its current owner, Mesquite Colorado Holdco L.L.C (Mesquite). CSU already owns the other 50% and would become the sole owner. Recently, CSU and Mesquite reached an agreement on the acquisition price for the asset, of $92.7 milllion. While moderately higher than CSU's original estimate, the acquisition price still generates adequate cost savings for CSU. In November, CSU received two major approvals for the acquisition, from its City Council and the Federal Energy Regulatory Commission. One key approval remains outstanding, in regards to the FRP maintenance service provider. If the transaction is completed by year end 2010 (at the earliest), FRP generating assets would then be placed on CSU's balance sheet. Fitch views the proposed transaction favorably as it would further diversify the system's power supply and should provide financial benefits given the current cost of capital to fund the acquisition and the current terms of the purchased power agreement between CSU and the co-owner (CSU currently purchases more than its owned power share). While the transaction is not final, management has provided Fitch with preliminary financial projections assuming the acquisition. As such, the potential acquisition would not materially impact the rating.

Colorado Springs maintains solid financial metrics on both a combined basis and individual system basis as each of the separate utility systems is financially self-sufficient and there is no cross-subsidization of utility financial performance. Debt service coverage, including development fees, has remained comfortably above 2.0 times (x) for the past five years. Even when excluding development fees, coverage was strong and comparable with other 'AA' rated credits at above 1.8x for the past five years. On a projected basis, coverage is expected to remain above 2.0x through 2020 (and above 1.69x excluding all development fees). Additionally, while internal liquidity (unrestricted cash and cash equivalents) is projected to decline further in fiscal year 2011 to approximately 86 days cash, CSU still maintains available bank lines of credit totaling $100 million, or the equivalent of 146 days operating cash and liquidity on hand - comparable to similarly rated systems. Beyond 2011, as annual rate increases are implemented, cash balances should recover to historic levels by 2014-15 timeframe.

Considerations for Taxable/Build America Bonds Investors:

The following sector credit profile is provided as background for investors new to the municipal market.

Public Power Bonds - key credit points:

Public power utility bonds in most cases are unsecured debt obligations supported solely by a pledge of net revenues generated by the utility including other legal structural protections, such as rate covenants, and debt service reserve fund requirements. Public power utilities (municipal and cooperative) are effectively owned by their customers with a mission to provide essential, reliable, relatively low cost electric service. The average rating is 'A+', compared to their corporate counterparts' average rating of 'BBB+', with approximately 40% rated at or above 'AA-' and 8.6% rated at or below 'BBB+'. The key credit underpinning supporting the high average rating is their self regulating authority (or local rate setting ability). Municipal utilities are generally not subject to state/federal regulatory oversight as compared to corporate utilities. This regulatory autonomy provides for a more timely recovery of costs (operating and debt service) through electric rates, and also gives public power issuers the ability to set financial targets/policies as well as renewable energy goals/standards. In addition, public powers predominantly residential customer composition provides for more stable energy sales and in turn more predictable financial performance. Those with below average ratings or low investment-grade or below-investment-grade ratings generally have a limited economic base, above average leverage (or debt burden) resulting in a high cost structure that may constrain financial flexibility.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (Oct. 8, 2010);

--'Public Power Rating Guidelines' (June 11, 2009).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

Public Power Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=447150

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.
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Geographic Code:1U2NY
Date:Dec 2, 2010
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