Snohomish County Public Utility District No. 1, Washington; Retail Electric

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1 Summary: Snohomish County Public Utility District No. 1, Washington; Retail Electric Primary Credit Analyst: Jeffrey M Panger, New York (1) ; jeff.panger@standardandpoors.com Secondary Contact: Paul J Dyson, San Francisco (1) ; paul.dyson@standardandpoors.com Table Of Contents Rationale Outlook Related Criteria And Research JUNE 3,

2 Summary: Snohomish County Public Utility District No. 1, Washington; Retail Electric Credit Profile US$ mil elec sys rev bnds ser 2015A due 12/01/2040 Long Term Rating AA-/Stable New US$48.93 mil gen sys rev bnds ser 2015 due 12/01/2045 Long Term Rating AA-/Stable New Snohomish Cnty Pub Util Dist #1 elec Unenhanced Rating AA-(SPUR)/Stable Affirmed Rationale Standard & Poor's Ratings Services has assigned its 'AA-' rating to Snohomish County Public Utility District No. 1 (SnoPUD), Wash's electric system revenue bonds, series At the same time, Standard & Poor's assigned its 'AA-' rating to SnoPUD's generation system revenue bonds, series Standard & Poor's also affirmed its ratings on the district's electric system and generation system parity obligations. The outlook is stable. We believe credit strengths include: Consistently strong liquidity, exceeding nine months of operating expenses over the past four years. We expect liquidity to remain solid despite SnoPUD's plan to cash defease $100 million of electric system debt in 2015; Coverage of fixed costs -- including debt service on electric system and generation system debt and power purchased from Bonneville Power Administration (BPA), which has also been solid. Management's projections, which we believe are based on reasonably conservative assumptions, suggest the trend will continue through 2019; The stability and wealth of the underlying economy, which encompasses much of the northern Seattle suburbs, with manageable load growth projected, primarily related to Boeing Co.'s expansion; and Forward-looking resource planning that has allowed the district to comply with environmental regulations and accommodate load growth while preserving financial metrics consistent with the rating. In our opinion, credit weaknesses include: Exposure to revenue volatility related to both hydrology risk (and its impact on wholesale sales) and reliance on economically sensitive developer contributions; Above-average rates, which we expect to rise modestly as SnoPUD passes through cost increases from BPA, which supplies 82% of the district's energy; and A sizable capital program. However, we believe the resulting increased leverage will be manageable within the context of the district's financial profile and considering its planned defeasance of $100 million of debt. Proceeds of the electric system bonds will fund general capital improvements. A senior lien on net electric system revenue secures the bonds. At fiscal year-end 2014 (Dec. 31), the district had $318 million of senior electric system JUNE 3,

3 Summary: Snohomish County Public Utility District No. 1, Washington; Retail Electric revenue bonds. Proceeds of the generation system bonds will finance construction of two small hydroelectric projects. SnoPUD has $167 million of generation system debt outstanding. Although debt service on the district's generating system obligations are an operating expense of the electric system, we make no rating distinction, and in calculating coverage metrics, we treat these obligations as debt of the electric system. Snohomish County is immediately north of Seattle. With more than 332,000 customers, SnoPUD is the second-largest municipal utility in the State of Washington. Boeing Co. and Everett Naval Station anchor the county economy. Boeing whose facility in Everett, Wash., employs about 39,000, is constructing a $1 billion, 1.3 million square-foot facility to fabricate carbon composite wings for its new 777x aircraft. The Naval Station recently added three destroyers to the homeport, bringing 900 additional sailors to the 6,000 stationed in Everett. We expect these additions to help compensate for load losses associated with the 2012 closure of the district's largest customer, Kimberly-Clark Corp., which operated a pulp and paper plant. We believe county demographics are favorable, with median household effective buying income at 132% of the national average. This suggests rate-raising flexibility, although already-above-average rates limit this. SnoPUD benefits from a low-cost, 3.3 cents per kilowatt-hour (2014) mix of primarily hydroelectric assets. Purchased power accounts for bulk of energy needs, with BPA supplying 82% under its block (fixed) and slice (variable) products. On Oct. 1, 2011, The district began receiving its BPA power supply under a new 18-year contract that is a mixture of slice and block power allocations. In our view, this resource, combined with owned and renewable resources, provide ample energy to meet load demands, and provide an opportunity for significant wholesale sales under average stream flow conditions. Like many utilities in the Pacific Northwest, SnoPUD's revenue on wholesale sales has varied in recent years, the product of fluctuating hydrological conditions and low natural gas prices that set the margin for wholesale electricity prices. Better-than-average hydrological conditions contributed to an uptick in 2014 as wholesale sales revenue reached $59 million (9% of operating revenue), more than $10 million above fiscal 2013 levels, but still well below levels in the previous decade. We believe that financial metrics continue to support the rating. Coverage of fixed costs -- which include generation system debt and about 40% of purchased power expenses related to power purchases from BPA -- were 1.35x in 2014, 1.43x in 2013, and 1.40x in However, while economically sensitive capital contributions represented only 2% of total revenue in 2014, they were a more significant 17% of net available money to service fixed cost obligations. In the hypothetical absence of these capital contributions, fixed cost coverage would have been 1.25x in 2014, which illustrates exposure that the district might face during economic stress. In our opinion, SnoPUD conservatively budgets for the current year, assuming that water levels will be 87% of average. We also believe that the district is prudent in assuming average water levels for out-years. Management projects 1.24x fixed cost coverage in 2015, partially a result of the expectation of below average hydrological conditions. Projections of financial operations for suggest fixed cost coverage levels in line with previous results. SnoPUD's strong liquidity underpins our analysis, and enables the utility to maintain credit quality even if coverage JUNE 3,

4 Summary: Snohomish County Public Utility District No. 1, Washington; Retail Electric levels dip over a relatively short period. Liquidity has consistently been a strength for the district and we expect this to continue, albeit at slightly reduced levels. At fiscal year-end 2014, SnoPUD had $448 million in unrestricted cash and special funds, providing what we consider a strong 290 days' worth of operating expenses. We believe that while higher than what we generally see from utilities outside of the region, increased liquidity is necessary for those in the Pacific Northwest, which are exposed to hydrology risk. For the district, this takes on added importance given the impact of economically sensitive developer contributions to its bottom line. We understand that the district expects use $100 million in 2015 to cash defease electric system debt, but we believe that liquidity will still be strong. SnoPUD's rates are above the state average, suggesting that despite solid demographics, there are constraints to revenue-raising flexibility. According to the Department of Energy's Energy Information Administration, average revenue per kilowatt-hour was 16% above the state average in 2013 (the most recent year for available comparative information), indicating below-average competitive positioning. The district has a record of adopting regular and modest rate increases and has historically passed through BPA rate increases. This pass-through is not automatic, and that rate increases are subject to public hearings. Financial projections include modest 2.9% rate increases in 2017 and We expect leverage will increase over the next five years. SnoPUD has $814 million in capital needs over the next five years, and expects to issue a $419 million of additional debt over this period. The district's renewable resources make it compliant with Washington's Renewable Portfolio Standard (I-937) through 2019, while management projects that it will qualify for exemption through 2027 because it is at the 4% cap for spending renewables. Outlook The stable outlook reflects the projections that historically solid coverage levels will continue in the next two years, while SnoPUD's strong liquidity provides a short-term cushion in the event of unfavorable hydrological or economic conditions. Furthermore, we gain comfort in what we believe are conservative assumptions in the projections. Upside rating potential would depend on establishing a trend of coverage of fixed costs that are in excess of historical and projected metrics. Downside rating potential exists if, in the absence of corrective action, adverse conditions such as poor hydrology, continued economic weakness, or depressed energy prices results in erosion of liquidity and a trend of coverage levels that are inconsistent with the rating. Related Criteria And Research Related Criteria USPF Criteria: Electric And Gas Utility Ratings, Dec. 16, 2014 USPF Criteria: Methodology: Definitions And Related Analytic Practices For Covenant And Payment Provisions In U.S. Public Finance Revenue Obligations, Nov. 29, 2011 Related Research U.S. State And Local Government Credit Conditions Forecast, April 2, 2015 U.S. Public Power 2015 Outlook: Despite Several Looming Issues, Credit Quality Should Remain Stable, Jan. 9, JUNE 3,

5 Summary: Snohomish County Public Utility District No. 1, Washington; Retail Electric Ratings Detail (As Of June 3, 2015) Snohomish Cnty Pub Util Dist #1 elec sys rev bnds ser 2004 Long Term Rating AA-/Stable Affirmed Snohomish Cnty Pub Util Dist #1 elec sys rev bnds & generation sys rev bnds Long Term Rating AA-/Stable Affirmed Snohomish Cnty Pub Util Dist #1 generation sys rev bnds (babs) ser 2010B due 12/01/2040 Long Term Rating AA-/Stable Affirmed Snohomish Cnty Pub Util Dist #1 elec sys rev bnds ser 2004 due 12/01/ Unenhanced Rating AA-(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Complete ratings information is available to subscribers of RatingsDirect at All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. JUNE 3,

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