Fitch Rates South Texas Electric Cooperative 'A-'

Business Wire,  March 31, 2008  

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NEW YORK -- Fitch Ratings assigns a long-term issuer rating of 'A-' to the South Texas Electric Cooperative (STEC). The Rating Outlook on is Stable. This is Fitch's initial rating of STEC.

Supporting the 'A-' rating for STEC are financial metrics that are in line with comparable utility systems in the rating category, competitive wholesale rates and all-requirements power sales contracts with STEC's eight members. STEC is supported by the solid credit profile and diversity of its member systems, which include Karnes, Wharton County, Victoria, Jackson, San Patricio, Nueces, Magic Valley and Medina electric cooperatives. Overall, the members' service territory is projected to increase 4.7% annually and grew at 5.3% historically. Magic Valley, one of the newest members, accounting for approximately 47% of STEC's customers, is projected to experience the greatest amount of growth at 6.6% annually (9% historically).

The rapid growth that STEC's members are experiencing is a primary reason for the acquisition of major new generation. As such, the rating also takes into consideration that financial metrics will face pressure as STEC implements a $1.2 billion capital plan. Under the capital plan, STEC would diversify its fuel portfolio by developing coal and wind generation to reduce dependence on natural gas. STEC is partnering with International Power to develop Coleto Creek 2, a 700 mega watt (mw) coal-fired plant of which, STEC will own 343 mw, or 49%. The financial impact of potential CO2 regulation may put further pressure on STEC's financial profile in the out years.

Looking forward, Fitch will monitor the following key credit drivers that could affect the rating:

--Construction risks and ultimate costs associated with the completion of the coal-fired generator, Coleto Creek 2;

--Management's ability to sustain financial metrics in line with the current rating, as STEC expects to add $1 billion to its $312 million of outstanding debt;

--Environmental considerations.

Formed in 1944, South Texas Electric Cooperative is a generation and transmission wholesale provider to eight distribution cooperatives. These cooperatives provide service to over 150,000 customers in 42 counties and are located in the outlying areas of San Antonio, Houston, Corpus Christi, and the Rio Grande Valley, Texas.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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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