OREANDA-NEWS. August 10, 2015.  Fitch Ratings assigns its 'AA' rating to the following bonds issued by the Port of Morrow, Oregon and secured by payments from the Bonneville Power Administration (Bonneville):

--Approximately \\$100 million transmission facilities revenue bonds, series 2015 (taxable).

The bonds are scheduled to price on Aug. 19, 2015, via negotiation. Bond proceeds will refund interim financing used to rebuild or reconfigure seven transmission lines and related facilities and pay costs of issuance.

Fitch also affirms the following outstanding ratings on parity debt issued by Port of Morrow, the Lewis County Public Utility District, WA, and Energy Northwest (ENW), WA and similarly secured by payments from Bonneville:

--\\$278 million Port of Morrow transmission facilities revenue bonds), series 2012 and 2014 (taxable) at 'AA';
--\\$894 million ENW Project 1 revenue bonds at 'AA';
--\\$3.5 billion ENW Columbia Generating Station revenue bonds at 'AA';
--\\$1.12 million ENW Project 3 revenue bonds at 'AA';
--\\$85 million Lewis County Public Utility District No. 1 Cowlitz Falls hydroelectric project revenue refunding bonds, series 2013 at 'AA'.

Fitch also affirms the rating on Bonneville Power Administration's implied non-federal revenue obligations at 'AA'.

The Rating Outlook for all bonds is Stable.

SECURITY

The Port of Morrow bonds are payable from lease payments made to the Port of Morrow from Bonneville, which are an absolute and unconditional payment obligation. Bonneville's payments are made as an operating expense from the Bonneville Fund and are on parity with ENW's outstanding \\$5.51 billion in electric revenue bonds the Cowlitz Falls hydro bonds and outstanding Port of Morrow bonds. These payments are paid prior to Bonneville's payments on borrowings from the U.S. Treasury (\\$4.2 billion) and federal appropriations debt (\\$4.1 billion).

KEY RATING DRIVERS

BONNEVILLE'S OBLIGATION SECURES BONDS: The rating on the Port of Morrow bonds reflects the credit quality of Bonneville and its absolute and unconditional obligation to make payments for debt service. Bonneville has pledged the Bonneville Fund, which includes revenues from its power and transmission business lines.

COMPETITIVE REGIONAL SUPPLIER: Bonneville provides wholesale electricity to a population of more than 12 million in the Pacific Northwest region through a competitive resource portfolio consisting primarily of low-cost hydropower. Transmission services are provided to a similar six-state region but to a broader cast of utilities.

LOW-RISK POWER SALES CONTRACTS: Bonneville sells power through long-term, take-or-pay contracts that recover cost of service from 125 preference customers. The contract terms limit Bonneville's financial exposure to member load increases and lower-than-expected generation output. However, the contracts expire in 2028 and customers are not obligated to continue to purchase from Bonneville if new contracts are not signed.

CASH RESERVE VARIABILITY: Cash reserves have been variable given market price fluctuations and changing hydrology conditions, but showed some strengthening in fiscal 2014 and to date in fiscal 2015. Bonneville also has access to a \\$750 million federal line of credit with the U.S. Treasury Department, which provides additional liquidity.

LIMITED CAPITAL ACCESS: Bonneville's access to capital is limited as it cannot issue debt on its own and has a \\$7.7 billion ceiling on borrowing from the U.S. Treasury. However, Fitch expects that access to alternative forms of financing will be sufficient to meet Bonneville's significant capital needs.

RATING SENSITIVITIES

FURTHER RESERVE DECLINES: Bonneville Power Administration has taken steps to reduce its reliance on net secondary revenues in recent years. However, a further trend of net secondary revenues lower than expected and declining cash reserves could pressure the ratings.

CREDIT PROFILE

The Port of Morrow (the Port) is a port district located in Morrow County, Oregon. The Port has the legal authority to own and issue bonds to fund transmission assets throughout the region. This right was validated by a court opinion sought by the Port in March 2012, prior to the first lease transaction executed with Bonneville. According to the terms of three lease agreements between the Port of Morrow and Bonneville, Bonneville makes unconditional lease payments directly to the trustee (the Port has assigned the lease revenues to the trustee) that are equal to debt service on three series of outstanding bonds, including the proposed series 2015 bonds. Bonneville retains operational control of the transmission assets.

Bonneville is the largest of the regional federal power marketing agencies within the Department of Energy. Bonneville accounts for approximately 28% of the electricity consumed and 75% of the transmission infrastructure in the region. The majority of Bonneville's revenues are provided by power operations. Transmission revenues accounted for 26% of operating revenues in fiscal 2014.

BONNEVILLE'S RATING NOT BASED ON DIRECT FEDERAL SUPPORT

Fitch's ratings on Bonneville's implied revenue obligations and the related ENW, Port of Morrow, and Lewis County Public Utility District (PUD) No. 1 bonds reflect the credit quality of the administration as a self-supporting entity. Bonneville's subordinate obligations to the U.S. Treasury offer a layer of structural support, in that Bonneville may defer payment to the Treasury, if necessary, which could provide flexibility to the payment obligations ahead of Treasury, but Fitch's rating reflects the expected timely repayment on all obligations. While a linkage with the federal government exists in the form of governance by the DOE, appointment of the administrator, congressional approval on Bonneville's budget, and the banking and lending relationship with Treasury, the rating reflects Bonneville's ability to repay its obligations from ongoing revenues.

REGIONAL COOPERATION DEBT

Bonneville and Energy Northwest have agreed to a regional cooperation debt plan that will extend maturities of ENW debt (Columbia Generating Station and Projects 1&3) and use the revenues made available from lower debt service costs on those projects to prepay higher interest rate debt to the U.S. Treasury). While this effectively accelerates payment of Bonneville's subordinate lien obligations by extending the senior ENW bond maturity, it provides additional federal borrowing capacity and provides economic benefit to preference customers.

SUFFICIENT POWER SUPPLIES; RELIANCE ON NET SECONDARY REVENUES

Bonneville is statutorily required to provide power to preference customers in the region. Bonneville currently makes power sales to preference customers under 20-year contracts that became effective in fiscal 2012. The contracts limit Bonneville's role as a regional provider to the allocation of the existing federal system (predominantly hydro-electric generation but including the Columbia Generating Station) at cost-based rates.

For operational planning purposes, Bonneville uses an assumption of water conditions below the 30-year average, referred to as critical water. Bonneville estimates the total federal system will produce 8,136 aMW of firm energy under low (or critical) water conditions in fiscal 2016. This represents the amount of firm energy (Tier 1) Bonneville plans to have available to divide among its preference customers, with an estimated demand in fiscal 2016 of 6,981 aMW. Bonneville's other power sales include small amounts to federal agencies in the region and direct service industrial customers. The remaining capacity can be sold into the market.

For ratemaking and financial planning purposes, Bonneville considers the additional energy production available for sale under 'average' water conditions. The federal system is expected to produce 10,507 aMW in 2016, based on average water conditions. The production in excess of estimated demand is assumed to be sold at forward market prices, with revenues used to supplement sales to preference customers. These wholesale sales, netted against market purchases made by Bonneville during certain months of the year to shape the output of the federal system, compose net secondary system revenues.

RESERVE VARIABILITY

Bonneville's sizable hydro-electric generation fleet will continue to require market sales in some months and market purchase in other months to balance the load demands with actual output of the federal system. While Bonneville has reduced its financial reliance on net secondary revenues in recent years, there will continue to be a degree of variability in net secondary revenues in the power business line. The risk of revenue variability is managed through cash reserves and ultimately, a cost recovery adjustment clause, if needed.

Bonneville's reserves for risk, or unencumbered reserves, improved to \\$784 million in fiscal 2014, after five previous years of declines. However, only \\$273 million of the reserves were in the power business line while the remaining reserves represented a strong reserve position in the transmission business line.

Initial indications for end of year fiscal 2015 suggested an possible decline in combined reserves to as low as \\$496 million but management estimates, based on more recent performance through the third quarter of fiscal 2015, that reserves will end fiscal 2015 above fiscal 2014 levels and the reserves specific to the power business line will improve.

LARGE CAPITAL INVESTMENTS NEEDED
As with many utilities across the county, Bonneville faces the issue of aging infrastructure and delayed capital reinvestment. Capital needs over the next five years are estimated at \\$4.2 billion, with most of the spending (around \\$2.2 billion) occurring in the transmission business line. These amounts do not include approximately \\$600 million that ENW estimates will be needed at the Columbia Generating Station through 2024. Capital needs are expected to continue to place upward pressure on Bonneville's rates. Bonneville will raise its power rates 7.l% and transmission rates 4.4% on October 1, 2015.

Bonneville and its customers face the challenge of funding upgrades and improvements to the valuable fleet of aging hydroelectric facilities, owned by the Bureau of Reclamation and U.S. Army Corps of Engineers. Bonneville makes the decisions regarding the pace and scope of capital reinvestment. Bonneville does not have authority to issue its own debt and has a statutory debt limit with the U.S. Federal Treasury of \\$7.7 billion, complicating capital funding decisions. The Port of Morrow or similar lease financing structures are expected to provide financing for transmission assets while the regional cooperation debt strategy frees up ongoing treasury capacity.

Bonneville and its customers have elected to fund energy efficiency programs of around \\$100 million annually from rates beginning in fiscal 2016 rather than capitalizing the expenditures as had been done in the past. This reduces future capital funding needs and reflects a commitment by Bonneville and its customers to raise rates to fund energy efficiency.