Fitch Rates Snohomish County PUD No. 1's (WA) $58MM Electric System Rev Notes 'F1+'

Proceeds will refund outstanding series 2008A notes issued in October 2008 that funded the purchase of the district's outstanding 1995 variable-rate generation system revenue bonds. The 2009B notes rank on parity with the 2009A notes and the district's junior lien electric system obligations.

Fitch is also affirming the following ratings for Snohomish PUD debt outstanding:

--$254 million generation system revenue bonds at 'AA-';

--$262 million electric system revenue bonds at 'AA-' (senior and junior lien);

--$220 million series 2008A and 2009A electric system second series revenue notes at 'F1+' ($58 million of series 2008A notes will be refunded by the 2009B note proceeds).

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 the bonds on parity with the electric system revenue bonds given the combined operation of the two systems. No rating distinction is made with the senior and junior lien electric revenue bonds.

The 'F1+' rating on the series 2009B 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.

Fitch recently (Oct. 9, 2008) upgraded Snohomish PUD's long-term debt rating to 'AA-' from 'A+' based on the following key credit factors:

--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;

--Resolution of litigation stemming from the 2001 western energy crisis;

--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. Credit concerns include the potential for greater impact, although thus far muted, of the economic recession on kilowatt hour (kwh) sales and area economy, the ability of the district to continue to effectively manage the variable hydroelectric power supply and associated wholesale revenues, and maintain cash reserves adequate to support refinancing of the short-term notes should capital market access prove to be difficult in 12 months time.

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 accounted for 87% of power supply in 2008. The contract includes two products: 1) Block - which provides a firm amount of power each month, and 2) Slice - which 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.

In December 2008, Snohomish PUD entered into a new contract with Bonneville for 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/resources and energy efficiency. The cost of renewable energy is substantially higher than 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, is projected to remain solid. Debt service coverage on a combined basis (of both generation and electric system debt) was 3.7 times (x) in fiscal 2008 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 317,000 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 317,000 customers are relatively diversified with residential sales accounting for slightly more than 50% of retail energy sales. Customer concentration is not a credit concern. The top three customers account for 8% of revenues. The system is winter peaking, with a peak demand of 1,560 megawatts in 2008. Load growth has slowed in recent months, but is projected to continue to grow (<2% per year) post 2009.

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