Fitch Affirms Snohomish County WA PUD NO. 1 Bonds at 'AA-'; Outlook Stable

Fitch Ratings affirms the 'AA-' rating on the following Snohomish County Public Utility District No. 1 WA's (the district or PUD) bonds:

--$331.6 million electric system bonds;

--$188.8 million generation system bonds.

Fitch has withdrawn the 'AA-' rating on the Snohomish County Public Utility District No. 1 (WA) generation system revenue bonds series 2010C and Snohomish County Public Utility District No. 1 (WA) generation system revenue bonds (Taxable Build America Bonds-Direct Pay) series 2010D as the bonds were not sold.

The Rating Outlook is Stable.

SECURITY

The electric bonds are secured by electric system revenues, subject to the prior payments of operating expenses of the electric system (including generation system power costs). The generation system bonds are secured by revenues of the generation system, including payments from the electric system required to meet all obligations. Fitch rates the generation system bonds on parity with the electric system bonds given the operating relationship of the two systems.

KEY RATING DRIVERS

STRONG FINANCIAL PRACTICES: The district has financial policies designed to achieve debt service coverage (DSC) of at least 1.75x on electric system bonds, maintain significant financial reserves and adjust rates in a timely manner. Fitch calculated DSC for the electric system totaled 2.44x in 2013; consolidated coverage, including generation system debt service, was 1.95x.

SUBSTANTIAL CASH RESERVES: The board of commissioners previously established a comprehensive reserve policy to provide a sizeable financial cushion, which can be used to fund capital projects and meet operation and maintenance expenses. As of Dec. 31, 2013, cash and investments conservatively exceeded $300 million.

WELL-SOURCED HYDROELECTRIC RESOURCES: A mix of long-term block/slice contracts with the Bonneville Power Administration (BPA), approximating 85% of long-term energy resources, supplemented by renewable resources, other generation and conservation, allows the district to be well positioned to meet state mandates and future growth requirements.

HEALTHY SERVICE AREA: The district's customer base is sufficiently diverse and is anchored by the Boeing Company, the county's largest employer. The aircraft company accounts for about 4% of PUD energy sales revenues. While concentration risk does exist, Boeing's dominant position in the global aircraft market and strong local socio-economic factors, provide a counter balance to this concern.

RATING SENSITIVITIES

POWER MARKET VOLATILITY: Volatility in power costs, that is greater than forecasted, could impact the district's financial results. However, a solid record of adjusting rates and sizeable cash reserves largely mitigate this concern.

CREDIT PROFILE

The district's operations consist of three systems: the electric system, the generation system and the water system. Each system is separately financed. The district is the largest PUD in the state of Washington and the 12th largest public power utility in the United States (measured by customers). It serves more than 327,000 electric and 19,000 water customers. The county is located 30 miles north of Seattle and includes the city of Everett, home to the Boeing manufacturing facility and a U.S. naval station.

The utility benefits from low-cost wholesale power contracts with the hydro-based BPA, the largest power provider in the Northwest. The agreements extend through 2028. In 2013, BPA supplied 84% of the district's energy purchases. The vast majority of the district's power and energy needs are purchased pursuant to BPA's block/slice contracts. The district purchases and sells power in the short-term wholesale energy markets to balance the seasonal and daily variations in customer loads and its owned and contracted resources.

FINANCIAL POLICIES IN PLACE

In August 2007, the commission adopted a resolution establishing a financial reserve policy. The substantial reserve funds allow the district to mitigate risks from unforeseen financial variability and reduce the need for temporary surcharges. The PUD has also established financial guidelines that were developed for its electric system in connection with a comprehensive financial study. The district concluded that a minimum DSC ratio of 1.75x on its electric system bonds, no more than 40% debt financing of capital improvements, and a minimum of 90 days of non-power operating cash reserve should provide a capital structure that will minimize rates and maintain financial stability.

FLEXIBILITY TO ADJUST RATES

The district's average power supply cost is very competitive at $33.73 per megawatt-hour (MWh). BPA's weighted average power supply cost (block and slice) to the district is about $28.30/MWh. The board of commissioners has demonstrated a willingness to approve rate increases as needed. Snohomish implemented a 2.3% general rate increase on April 1, 2013 and, on Oct. 1, 2013, the PUD adjusted customer rates by 2.7% to account for a wholesale power rate increase from BPA. There will be no rate increase in 2014, but a 1.9% general rate increase is expected in 2015. The electric system's rates compare well with most other public and investor-owned utilities in the Pacific Northwest. Projected average retail rates per kilowatt-hour (KWh) for 2014 are: residential (9.1 cents), commercial (7.9 cents) and industrial (6.4 cents).

FINANCIAL PERFORMANCE IMPRESSIVE

Financial results, which will vary due to the district's high reliance on hydroelectric-based resources, have done well over the years. Fitch computed electric system DSC totaled 2.44x in 2013 versus 2.08x in 2012. Consolidated coverage, including generation debt, improved to 1.95x in 2013 from 1.78x in 2012. Financial results for 2014 should be in line with those of 2013. The forecast for operating results for the period 2014-2018 assumes electric system DSC ranging between 2.5x and 3.5x. The forecast contemplates the issuance of $75 million of new tax-exempt bonds in 2016, in addition to a possible refunding.

At Dec. 31, 2013, the district's cash position substantially exceeded the amount of reserves suggested in the utility's financial policies. The electric system conservatively had over $300 million in cash and investments, excluding a large power market volatility reserve. The district expects to regularly maintain liquid reserves of between $250 million to $300 million. The PUD invests funds consistent with the following objectives: preserve principal, maintain adequate liquidity and maximize yield. The investments are purchased with the objective of holding the securities until maturity.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);

--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

U.S. Public Power Peer Study Addendum - June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=905854

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