OREANDA-NEWS. September 01, 2015. Fitch Ratings has affirmed the following electric system revenue bonds issued by Benton County Public Utility District (PUD) No. 1, WA:

--\\$53.6 million, series 2005, 2010, and 2011.

The Rating Outlook is Stable.

SECURITY
The bonds are payable from a pledge of net revenues of the electric system.

KEY RATING DRIVERS

RETAIL DISTRIBUTION SYSTEM: Benton County Public Utility District No. 1 (the district) is a retail electric system located in southeastern Washington, providing electric service to 50,053 mostly residential and commercial customers. The retail customer base is moderately concentrated with the single largest customer accounting for 11.6% of megawatt hour (MWh) sales and 8.3% of retail revenues in 2014.

SOLID FINANCIAL METRICS: Regular retail rate increases over the past decade have reduced the district's reliance on wholesale sales to support financial performance, leading to more resilient and consistent financial metrics that remain in-line with rating category medians. Fitch calculated debt service coverage and coverage of full obligations were 2.54x and 1.26x, respectively, in 2014. Liquidity levels were satisfactory at 166 days at the end of 2014.

FAVORABLE POWER SUPPLY: The District is primarily a distribution system that meets the majority of its load requirements through a long-term low-cost power contract with Bonneville Power Administration (BPA). Additional resources, particularly purchase power contracts for wind and renewable energy credits (RECs), keep the district compliant with the state's renewable portfolio standards.

COMPETITIVE RATES: The district's rates are expected to remain competitive following a 3.9% average retail rate increase effective in September 2015. Additional rate increases of 4.5% annually through 2019 are projected to match rising costs from BPA adopted rate increases, system capital needs, and other cost pressures.

INCREASING DEMAND: The district's service area continues to grow and diversify economically, helping to spur the 11.8% retail load growth experienced by the district from 2010 through 2014.

LOW DEBT LEVELS: The district's current debt profile compares favorably with rating category medians and is projected to remain a credit strength even if the district moves forward with a potential \\$16 million issuance in 2016/2017.

RATING SENSITIVITIES

RETAIL RATE INCREASES: Planned rate increases by the Benton County Public Utility District No. 1 over the next few years which produce moderate improvements in projected financial performance could lead to positive rating action.

CREDIT PROFILE

The District's service area comprises a population of approximately 86,770 located within approximately 939 square miles of Benton County, including the cities of Kennewick (approximately 89.5% of total customers), Prosser (6.7%), and Benton (3.8%). The district does not serve certain other areas within Benton County including the cities of West Richland and Richland; it also does not serve the significant operations by the U.S Department of Energy on the Hanford Reservation or the rural areas in the county which are served by the Benton Rural Electric Association.

The district is primarily a distribution system. The majority of its power is supplied through a long-term, low-cost power contract with BPA that expires in September 2028.

GROWING SERVICE AREA

The District's customer base is predominantly residential, accounting for 83.4% of total customers. However, retail MWh sales and revenues are more evenly distributed among customer classes. For example, in 2014, retail revenues were driven by residential customers (44.9%), general service (28.8%), irrigation (19.4%), and industrial (2.8%).

Customer concentration is moderate with the largest customer (an irrigation customer) accounting for 11.6% of MWh sales and 8.3% of retail revenues. The top 10 customers combined for 32.3% of MWh sales and 23.8% of retail revenues. With the exception of the largest customer, no single customer in the top 10 list contributes more than 3% of total retail revenues.

SOLID FINANCIAL PERFORMANCE

The district's efforts to realign its revenue structure to reduce its reliance on wholesale sales have resulted in more resilient and stable financial metrics. Fitch-calculated debt service coverage averaged 2.83x (2010-2014) and coverage of full obligations averaged 1.33x, both of which are in line with 'A+'/'AA-' medians. Operating margins remain narrow but sufficient, with stronger performance in years featuring higher revenues from wholesale sales. Retail rate increases, including the 3.9% increase being implemented in September 2015, are expected to improve operating margins to some degree.

Liquidity levels remain satisfactory. At the end of 2014, the district had \\$49.4 million in cash and investments or 138 days cash on hand. In addition, the district has a \\$10 million revolving line of credit with Bank of America (rated 'A'/Stable Outlook), which was extended to December 2016. The line of credit provides the district with an additional source of liquidity to meet any collateral posting needs; the district did not post collateral in 2013 or 2014.

Financial projections through 2019 reflect continued stability in financial performance supported by assumed modest load growth (0.53% annually) and annual rate increases of 4.5%, which are not yet approved by the commission. Fiscal 2015 is projected to end the year with a \\$1.5 million loss as the rate increase will only take effect in the fourth quarter and the district had fewer wholesale sales due to the below-average water year. However, Fitch calculated debt service coverage is expected to remain sound at around 2.07x. Cash levels are projected to decline modestly through 2016 before recovering thereafter as the district cash-funds capital improvements.

FAVORABLE DEBT PROFILE

The district's debt metrics compare favorably to similarly rated credits. Debt-to-FADS was a low 3.8x (2014) and debt per customer is also low at \\$1,142. The district has no definite debt plans at this time and plans on financing its \\$69.1 million capital investment plan (CIP) (2015-2019) through cash reserves and operating cash-flow. However, the district is working with some of its large irrigation customers on a potential transmission project that could eventually be debt-financed, if it goes forward. The total amount of debt, estimated at \\$16 million, would raise the district's debt-to-FADS to a still low 4.8x based on 2014 figures.