Fitch Rates Grays Harbor PUD No. 1, Washington, 'A'.

NEW YORK -- Public Utility District No. 1 of Grays Harbor County, Washington's (the district) $38.5 million, electric revenue and refunding bonds, series 2005 are rated 'A' by Fitch Ratings. In addition, the underlying rating of $32.4 million of outstanding parity electric revenue bonds is affirmed at 'A'. The Rating Outlook is Stable. Proceeds from the 2005 bonds will finance certain capital improvements and refund a portion of the district's outstanding series 1997 electric revenue bonds. The bonds are scheduled to sell on March 21 with Banc of America Securities and Lehman Brothers serving as comanagers and Seattle Northwest Securities serving as financial adviser.

The district's rating is supported by historically sound financial performance with good debt-service coverage levels and a hedged power supply position. Additional strengths include conservative budget assumptions regarding off-system sale revenue, the state's passive approach to deregulation, a diversified customer base, and management's good relationship with its rate-setting board of commissioners (as evidenced by timely rate increases to maintain the financial integrity of the utility during 2001-2002). While the service area demographics are slightly below-average in terms of wealth and economic base, our rating reflects recent and projected continued growth and diversification in the service territory.

Credit concerns revolve around Grays Harbor's heavy reliance on power purchases from Bonneville Power Administration (BPA) and the variability of hydro conditions in the Pacific Northwest. The major component of Grays Harbor's BPA power is 'slice,' which is defined as a 'slice or percentage of the federal hydro system.' This requires Power Resources Managers (PRM), Grays Harbor's power marketer, to manage its 1.1% share of BPA output. Another risk is the level of success related to its off-system sales, which are approximately 25% of gross electric revenues. Fitch believes the district's risk management policies, conservative budgeting, and experience should allow Grays Harbor to continue to successfully manage the risks associated with slice even through poor water years. While management has taken appropriate actions to shore up the financial system over the past few years, it would appear a slightly higher liquidity position is warranted given its reliance on BPA's slice product. Management is in the process of increasing their cash reserves above $30 million over the next few years.

Public Utility District No. 1 of Grays Harbor is an integrated electric system established in 1938. The district provides electric service to approximately 39,300 customers, predominantly in Grays Harbor County, which is located in southwestern Washington, roughly 110 miles south of Seattle. The district's service area encompasses 1,959 square miles. Residential and small commercial users account for the majority of the district's retail revenues at 77% for 2004. No single user accounts for more than 4.6% of retail revenues. The district purchases approximately 60% of its power from BPA (of which 44% is slice).