Fitch Rates Grant County PUD, WA's Electric System Rev Bonds 'AA'

Fitch Ratings has assigned an 'AA' rating to the Public Utility District No. 2 of Grant County, WA's (the district) approximately $50 million electric system revenue bonds, series 2014 K.

The bonds are being issued to fund a portion of the distribution system's capital plan and pay cost of issuance. The bonds are scheduled to sell via negotiation on Nov. 5, 2014.

The Rating Outlook is Stable.

SECURITY

The electric system bonds are payable from the electric system revenue bond fund after payment of distribution system operating expenses.

KEY RATING DRIVERS

LOW-COST POWER: The district provides exceptionally low-cost hydroelectric power to its retail distribution system (the distribution system) and its long-term contractual purchasers. The economic power allows the distribution system to keep retail electric rates very low and competitive.

AMPLE GENERATION CAPACITY: The distribution system is entitled to 63.3% of the physical output of the Priest Rapids Project (PRP) and has the ability to access 30% more through a financial entitlement, which is more than sufficient to meet its current and anticipated retail customer load.

WANAPUM FRACTURE WELL MANAGED: Strong financial metrics and ample liquidity put the district in a solid position to fund initial needed repair costs and capital improvements associated with the Wanapum Dam fracture and to withstand associated lower wholesale sales. Additional repair costs will be debt funded and increased operating and maintenance costs will be funded from reserves.

INCREASING PROJECT DEBT: Consolidated system leverage is expected to rise from an already high level of 7.8x debt to funds available for debt service (FADS) (peer median is 5.8x) as a result of significant debt needed to fund the PRP capital plan over the next several years. Favorably, the district forecasts annual rate increases that should bolster financial coverage and cash flow metrics, and will equity fund a portion of the PRP capital plan.

WHOLESALE SALES AND HYDROLOGICAL CONDITIONS: The distribution system is a net seller into the wholesale power market, which subjects it to variability in hydrological conditions and market prices. Positively, the system maintains adequate risk-management practices and cash reserves to manage the volatility.

INDUSTRIAL CUSTOMER CONCENTRATION: The 10 largest retail customers account for 36% of the distribution system's retail revenues, which creates customer and revenue concentration risk. The distribution system is readily able to sell its excess power into the wholesale market, which somewhat offsets the risk of unexpectedly losing a larger customer.

RATING SENSITIVITIES

MANAGEMENT OF REVENUE STREAMS: The district's ability to effectively manage its operations together with electric rates will be key to maintaining stable financial performance, despite reliance on variable wholesale sales.

CREDIT PROFILE

RETAIL SYSTEM WITH SIGNIFICANT HYDRO CAPACITY

The district's electric utility operations are comprised of its retail electric distribution system (the distribution system) and its hydroelectric generating project, the PRP. The PRP is separately financed and accounted for relative to the distribution system. It has a nameplate generating capacity of 2,067 MW, provided from the Priest Rapids and the Wanapum hydroelectric developments. The distribution system is entitled to 63.3% of the PRP physical output and the remaining generated power is sold through a combination of annual auctions and long-term take-or-pay contracts. The distribution system has the ability to take up to a maximum of 93.3% of PRP's combined output (63.3% physical and 30% financial), which provides flexibility as the system's retail load continues to grow.

Fitch views the distribution system and the separately secured hydro developments as a single, integrated system, given that the project debt is legally bound to the distribution system, making it the ultimate obligor.

For additional information related to the district, please see report dated Oct. 17, 2014 titled Grant County Public Utility District No. 2, Washington, available at 'www.fitchratings.com'.

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=906355

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