Fitch Rates Klickitat County Public Utility Dist, WA $42.5MM Electric Revs 'A-'; Outlook Stable

SAN FRANCISCO--(Business Wire)--
Fitch Ratings assigns an 'A-' rating to the approximately $42.5 million electric
revenue bonds to be issued by the Klickitat County Public Utility District No.
1, WA (the district). The bonds will be issued in three series - 2009A, 2009B
(bank qualified), and 2009C (taxable build America bonds) - although the amount
allocated to each series will be established closer to the pricing.

Fitch also assigns a 'A-' rating to the district's $89 million of outstanding
parity debt consisting of electric revenue bonds, series 2006A and 2006B.

The Rating Outlook on all the bonds is Stable.

The bonds are secured by a net revenue pledge of the district's electric system
and are expected to price in a negotiated sale the week of Nov. 16, 2009. Bond
proceeds will be used to fund ongoing capital needs of the district, including
investment in an expansion of a landfill gas generation facility (26 MW), fund a
debt service reserve fund, and pay costs of issuance.

The 'A-' rating reflects:

--Healthy financial performance;

--Revenue variability resulting from hydroelectric generation and a heavy
reliance on wholesale generation and transmission revenues;

--A long power supply position provided by competitively priced renewable
generation resources that exceed native load requirements;

--A changing contract with Bonneville Power Administration (the district's
primary power supplier; rated 'AA' by Fitch) that will introduce greater
hydrological variability to operations; and

--Customer diversity and continued load growth in the current economic downturn.

Credit concerns relate to the long power supply position and wholesale
transmission business that may introduce greater fluctuations in revenues over
time and heightened counterparty risk. Key credit drivers in the next two years
include successful completion of the Phase II expansion of the landfill gas
project and achievement of merchant sales that are near current projections, and
transition to the new Bonneville contract in October 2011.

Power used to serve retail customers is supplied by Bonneville Power
Administration (87% in fiscal 2008), under the terms of a long term contract.
Currently, the district purchases approximately 35 MW from Bonneville in a
load-following contract that provides energy needed to serve KPUD's load on a
real-time basis, in excess of energy generated by the McNary hydroelectric
project. KPUD has signed a new power sales agreement with Bonneville that will
begin in October 2011 and terminate in September 2028 that will move to the use
of a combined block and slice arrangement. The Slice power sales agreement
presents distinct financial risks and opportunities to the district in that it
allows the district to share in the benefits and risks of actual hydrological
conditions. The district plans to contract with The Energy Authority (TEA) for
power management services that will be needed to shape the slice power supply on
a real-time basis.

The district also owns three renewable generation resources, the McNary
Hydroelectric project, the H.W. Hill landfill gas project, and the White Creek
wind project. Given that it receives nearly all of its energy needed to serve
customers from Bonnevile, the district's investments in renewable energy
projects place the utility in a long capacity and energy position. The
investment in these resources is a business strategy to take advantage of local
renewable resources - a landfill gas opportunity at an extremely large landfill
in the county and the investment in one of the numerous wind projects in the
county - in order to take advantage of growing momentum and value of renewable
energy in western markets. Although contracts are in place for a portion of
these revenues and sensitivity financial projections performed by the district
show tolerance for deterioration in market prices for these sales, this is an
unusual risk profile for a small retail utility.

The district also operates a wholesale transmission business line. Although many
utilities own and operate transmission lines to serve customers, the district is
unique in that its transmission business also includes lines that have been
constructed on behalf of load-serving entities to connect into regional
high-voltage transmission lines owned by Bonneville. The incremental revenues
from this business line have benefited ratepayers, but it is an incremental risk
to this utility that does not usually exist at retail utilities. Management
appears to be using cautious contract terms and robust collateral requirements
to protect ratepayers from a counterparty default.

Financial performance is healthy for the rating category but appropriate for the
risk profile. Debt service coverage exceeded 2.3x in fiscals 2008 and 2007.
However, this will decline as the series 2009 debt service begins to amortize.
In addition, the district's debt service burden is backloaded, and a large
increase in debt service will occur in 2017 and 2020. Wholesale revenues account
for 38% of revenues but are projected to account for over 50% once the landfill
gas project expansion in completed in June 2010 and the conversion to the new
Bonneville contract occurs. Short-term market sales fluctuate over time and
district revenues will vary, prompting the need for healthier debt service
coverage and liquidity levels than a utility with only retail revenues.
Liquidity is strong at the end of fiscal 2008 with $16.7 million in unrestricted
reserves, or 211 days operating cash.

Klickitat County Public Utility District No. 1 is a retail electric system
located in south central Washington, providing service to 11,866 customers in a
predominantly rural, 1,904 square mile territory. There is modest customer
concentration with the largest five customers providing 23% of sales and 15.5%
of revenues. The largest customers include two energy companies, two food
packaging plants, and a lumber mill.

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

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Fitch Ratings
Kathy Masterson, 415-732-5622, San Francisco
Lina Santoro, 212-908-0522, New York
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com

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