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Fitch Rates Snohomish PUD

by Business Wire
Market Watch, October 9, 2008

Fitch Rates Snohomish PUD No. 1 (Washington) System Revs 'F1+'; Upgrades L-T to 'AA-'

SAN FRANCISCO -- Fitch Ratings has assigned an 'F1+' rating to the Snohomish Public Utility District (Snohomish PUD) No. 1's (up to) $60 million, generation system revenue notes, series 2008A. Proceeds will refund Snohomish PUD's outstanding series 1995 generation bonds and fund a termination payment for the swap associated with those bonds as well as costs of issuance. Fitch has also upgraded the following outstanding debt ratings for Snohomish PUD:

The Rating Outlook on the bonds is Stable.

Although the generation system bonds are paid as an operating expense of the electric system, Fitch rates both liens on parity given the combined operation of the two systems.

The 'F1+' rating on the series 2008A short-term notes reflects the long-term credit quality of Snohomish PUD, expected market access to refinance the notes upon termination, and a strong liquidity position that would be sufficient to repay the notes, if necessary.

The upgrade to the long-term underlying rating on Snohomish PUD's generation and electric system revenue bonds reflects a competitive power supply portfolio, substantial resolution regarding the terms of a new 20-year power purchase contract to be signed with the Bonneville Power Administration in the next two months, resolution of litigation stemming from the 2001 western energy crisis, and success in budgeting Snohomish PUD's variable hydroelectric resources. Ongoing credit positives include a strong financial position with healthy cash reserve levels, solid financial policies and targets, and conservative risk management practices.

Snohomish PUD's competitive power supply is based on a low-cost power sales contract with the Bonneville Power Administration (rated 'AA-' with a Positive Outlook by Fitch), which accounts for 88% of power supply in 2008. The contract includes two products: 1) Block - that provides a firm amount of power each month and 2) Slice - that provides the district with a percentage of the federal system. The Slice product requires active power management of the resource and has the potential to provide excess energy in high water conditions. Therefore, regional water conditions and market prices have a direct impact on the district's operations and financial position. Snohomish PUD mitigates the surplus revenue volatility associated with the Slice contract by: budgeting based on conservative water conditions (Snohomish PUD has substantially exceeded budgeted wholesale revenues since 2002) and maintaining substantial cash reserves and conservative risk guidelines.

Snohomish PUD will likely renew its contract with Bonneville in December 2008 for another 20 years beyond the current 2011 contract term, which will provide a high level of power supply certainty at attractive prices for the long-term. Snohomish PUD's remaining power supply will be provided by its limited owned resources (a hydroelectric project and a co-generation facility) as well as from new wind contracts the district has secured. As with other utilities that must comply with state renewable targets, the district expects to meet load growth through new renewable contracts and resources. The cost of renewable energy are substantially higher that the district's existing power supply and will likely create long-term cost pressure on rates, although this will be the case in the industry as a whole.

Snohomish PUD's financial position is strong and with moderate growth, projected to remain solid. Debt service coverage on a combined basis (of both generation and electric system debt) was 2.6 times (x) in fiscal 2007 and cash reserves have continued to increase over the past few years with healthy wholesale sales and lower than anticipated power costs. Debt levels are moderate, providing debt capacity to support the expected capital spending, a portion of which will be debt-financed.

Snohomish PUD is a retail electric system that provides electric service within the county to approximately 696,000 people and 311,000 electric customers. Located 30 miles north of Seattle, the county includes the city of Everett, which is home to the Boeing manufacturing facility and a Naval Station, two of Snohomish PUD's largest customers. Snohomish PUD's 312,000 customers are relatively diversified with residential sales accounting for slightly more than 50% of energy sales in fiscal 2007. Customer concentration is not a credit concern. The top three customers account for 8% of revenues. The system is a winter peaking system with a peak in 2007 of 1,417 MW. Load growth has averaged 3% over the last five years, although growth has slowed in recent months.

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

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.

Business Wire
Fitch Rates Snohomish PUD
Market Watch, October 9, 2008

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