Fitch Affirms Los Alamos County Utility System, New Mexico 'A-' Revenue Bonds.

SAN FRANCISCO -- Fitch Ratings assigns an 'A-' rating to the $2.875 million County of Los Alamos, NM Utility system revenue bonds, series 2006A and $4.645 million taxable series 2006B. The Rating Outlook is Stable. Additionally, Fitch affirms its 'A-' rating on the county's $60 million in outstanding revenue bonds, series 2004A and series 2004B. The Rating Outlook is Stable. Bonds are secured by a combined net revenue pledge of the electric, gas, water, and wastewater utility systems. The electric system is the largest of the four utilities, accounting for 69% of combined revenue in fiscal year (FY) 2006.

The 'A-' rating takes into account the extreme customer concentration presented by the Los Alamos National Laboratory (LANL), the strength of the Los Alamos Utility System (LUS) electric revenues, which are sufficient to pay debt service on the bonds, LUS' stable financial performance, adequate debt service coverage over 1.3 times (x) the past five years, and solid demographics. Liquidity is sufficient for the risk profile of the utility with unrestricted cash of approximately $20 million, which is equal to approximately 184 days of operating expenses. The county's economy, albeit small, has wealth levels well above state and national levels, reflecting the concentration of LANL in the county's employment base.

The key credit characteristic of Los Alamos Utility System (LUS) is the electric utility's largest customer, the Department of Energy's (DOE), owner of LANL. LANL is a multi-program scientific laboratory with an annual budget of $2.1 billion. LANL accounts for over 15,000 jobs in Los Alamos County, which has a population of just under 19,000. The mission of LANL includes ensuring the safety and reliability of the U.S. nuclear stockpile and developing strategies to reduce the threat from weapons of mass destruction. Operations of the laboratory were taken over in July 2006 by a new operator (Los Alamos National Security, LLC). However, the change in operator has not impacted the demand for utility services or the LUS contract.

LUS has a contract with DOE. In June 2006, the contract was extended to 2015. The contract has been extended six times since its initiation in 1985 and management anticipates that it will be extended again beyond the current 2015 termination date. The contract requires a pooling of the County and DOE's combined 123 MW of generation resources and outlines a cost-sharing methodology for the assets, which is designed to achieve cost equity between the DOE and county ratepayers. Until the recent contract extension, there was a mismatch between the maturities of bonds issued originally in 1994 and refunded in 2004 that were used to build facilities to serve LANL. Fitch relied on bondholder protection provided by the contract provision that subjects the bonds to acceleration during the remaining seven-year term if the DOE does not renew the contract. However, the contract termination now coincides with the final maturity of the majority of LUS debt. Only $4.5 million matures after 2015 and this debt is allocable to residential ratepayers in the county and not the DOE.

The presence of LANL creates significant utility revenue concentration (approximately 71% of LUS electric system revenues and 50% of combined revenues). LANL is the largest employer in the county and the local economy is almost entirely dependent upon the activity of the laboratory. Additional utility concerns include dry year hydroelectric risk (45.6% of power supply) and the system's relatively small customer base.

The County of Los Alamos Utility System is a combined utility system, providing electric, natural gas, water, and wastewater services to Los Alamos County. The county is located in northern New Mexico, approximately 35 miles northwest of Santa Fe. Operating revenues for fiscal 2006 totaled $52 million, comprised of 69% electrical, 17% gas, 10% for water, and 4% for wastewater. The vertically integrated electric system is operated by the County and serves approximately 8,700 customers. The electric customer mix is predominately residential, but the revenue mix is significantly concentrated within LANL. The system peak demand in 2006 was 85 megawatts (MW).

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