Fitch Rates Grant PUD Priest Rapids and Wanapum Hydro Proj Bonds 'AA'; Elec Sys Bnds Upgraded to 'AA'; Stable Outlk.

NEW YORK -- Grant County Public Utility District No. 2's (Grant PUD) proposed 2005 issuance of Priest Rapids hydroelectric development revenue bonds are rated 'AA' by Fitch Ratings as follows:

-- $61 million 2005 series A (non-AMT);

-- $26.7 million series B (AMT);

-- $42.5 million series Z (taxable).

In addition, the outstanding $174.5 million Wanapum and $290.5 million Priest Rapids hydroelectric development revenue bonds are affirmed at 'AA' by Fitch. The Rating Outlook is Stable.

Fitch is also upgrading Grant PUD's $217 million electric distribution system bonds to 'AA' from 'AA-'. The Rating Outlook is revised to Stable from Positive. The electric distribution system upgrade reflects improved financial condition, strengthened power supply position, and fiscally sound, proactive new management team.

The bonds of the hydroelectric development projects and the electric distribution system are separately secured. The 2005 Priest Rapids bonds are expected to price on Nov. 30, with Citigroup as lead underwriter of the deal. Proceeds of the Priest Rapids bonds will be used to finance improvements at the hydroelectric generating facility and refund certain outstanding bonds of the Priest Rapids development.

The 'AA' rating of the Grant PUD hydroelectric developments reflects the projects' very low cost of production (less than 1.0 cent per kilowatt hour (kwh)) and solid project operating performance. Despite record low water conditions in the Northwest in 2001, the hydroelectric power projects (hydro projects) maintained their spill program, aimed at protecting migrating juvenile salmon along the Columbia River, and still produced power at an average cost of less than 1.2 cents per kwh. In comparison, the Bonneville Power Administration's (the region's largest power supplier) average wholesale cost to 'preference' municipal customers is approximately 3.0 cents per kwh for 2004. Through 2010, including projected capital expenditures at the hydro projects and average water conditions, Grant's hydro production costs will remain competitive at an average of $11 - $19 per mwh. A recent positive development was the signing of new power sales contracts with various public and private off-takers of the hydro projects' output, which took effect for Priest Rapids as of Nov. 1, 2005 and will take effect for Wanapum in 2009.

Fitch's upgrade of Grant PUD's electric distribution system bonds to 'AA' reflects strengthened financial performance, an improved power supply position with the execution of the new power sales agreements for Priest Rapids output in 2005, and very low retail rates - averaging just 2.96 cents per kwh for 2004. Financial protection measures, including liquidity and debt service coverage, have improved over the past 10 months to approximately 250 days operating cash and 2.1 times (x) debt service coverage (excluding non-cash deferred power expense). Pursuant to the Federal Energy Regulatory Commission (FERC) ruling on PL83-544, the district is now entitled to up to 70% of the hydro projects' output (from 36.5% historically) as new power sales agreements take effect (2005/2009) - considerably improving the district's power supply position. Moreover, going forward the district's low water year risk is substantially reduced, and there is a greater opportunity to supplement the electric system's financial position with sales of low-cost surplus hydro power sales.

Credit concerns for the electric distribution system are an agrarian service territory with below-average demographic characteristics, and the need to effectively manage the district's now long power-supply position, particularly in better than average water years.

Credit risks for the hydro projects center on two main issues, the potential for further fish protection expenditures and expiration of the hydro projects FERC operating licenses on Oct. 31, 2005. A biological opinion from NOAA fisheries received in 2004 helps to limit fish-related expenditures for known endangered species, although new species could be listed as endangered in the future. Grant is achieving some success with new improved fish-friendly turbines at one of the hydro projects, reducing the need for spill to preserve fish survival. Offsetting the FERC relicensing risk are the following factors:

-- The district has operated the facilities responsibly, adequately addressing fish and wildlife protection issues in the past;

-- As a federal project subject to PL83-544, a portion of the inexpensive power resource is certain to remain for the public benefit of the region;

-- Grant PUD's fairly successful efforts to gain the support for the project's relicensing by various state/federal environmental groups and American Indians affected by the project;

-- Grant PUD has thus far successfully navigated past many of the major hurdles in the FERC license renewal process.

The district is anticipating a FERC decision on the license as early as mid-2006.

Grant PUD consists of three separately financed and accounted-for systems: the electric distribution system; Wanapum hydro project; and Priest Rapids hydro project. The distribution system purchases power from the hydro projects to serve its native load. For 2005, the district's portion of the Priest Rapids and Wanapum projects output is approximately 62% and 36.5%, respectively, with the remainder of the hydro power sold off-system via contract to various public and corporate utilities in the northwest. The electric distribution system provides service to roughly 41,100 customers in a primarily agrarian service area in central Washington State.

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