LOS ANGELES -- Standard & Poor's Corp. yesterday said it would remove Washington Public Power Supply System nuclear power projects 1, 2, and 3 bonds from CreditWatch if the Bonneville Power Administration's proposed rate increase is approved.

Bonneville secures those WPPSS bonds and certain other tax-exempt utility bonds.

Earlier this month, Bonneville proposed an average 14.6% rate increase to take effect Oct. 1 and cover a two-year fiscal cycle. Fiscal 1994 begins for Bonneville on Oct. 1.

Bonneville also proposed an interim rate adjustment mechanism under which the agency could raise rates up to 10% in fiscal 1995 if reserve levels fall below $145 million at the end of fiscal 1994.

Standard & Poor's in late April placed the Bonneville-backed debt on CreditWatch with negative implications, citing Bonneville's financial deterioration over the past two fiscal years.

Yesterday, however, Standard & Poor's said the combination of the proposed rate increase and the rate adjustment mechanism would lead to removal of the CreditWatch listing.

"This will occur if the proposed rates are submitted as [Bonneville's] ~final record of decision' on or about August 2, 1993," Standard & Poor's said in a release.

The recently proposed rates represented a draft decision by Randall Hardy, Bonneville's administrator. Following a comment period from local utilities and others who obtain power from the federal agency, Hardy is expected to submit the rate increase on Aug. 2 to the Federal Energy Regulatory Commission for approval.

"We feel relatively comfortable" that the final rate decision will resemble the draft proposal, said Malachy Fallon, a director of Standard & Poor's.

Standard & Poor's rates WPPSS units 1, 2, and 3 bonds AA. Moody's Investors Service and Fitch Investors Service in recent days also confirmed their double-A ratings in conjunction with the supply system's $695 million refunding that was priced yesterday.

As a result of continued financial and rate pressure for Bonneville beyond the upcoming two-year fiscal cycle, Standard & Poor's said it is likely that "the rating outlook will be negative" once the WPPSS bonds are removed from CreditWatch.

"They've overcome the immediate challenge, but there is still a longer-term challenge they'll have to deal with," Fallon said.

James Curtis, Bonneville's assistant administrator of financial management, said he was "somewhat" pleased with the Standard & Poor's comments, though "I would hope that we would deserve better than a negative outlook."

Fitch's rating assessment also includes a "declining" credit trend.

Bonneville's recent financial deterioration reflects various circumstances, including a drought in the Pacific Northwest that reduced hydroelectric power production and forced Bonneville to rely more on higher cost purchases of outside power.

In response, Bonneville is pursuing program cuts and the rate increases to help restore financial stability.

Bonneville now estimates that reserves could total $155 million at the end of fiscal 1993, up from earlier projections of $90 million. The agency's current goal is to bring reserves up to $370 million by the end of fiscal 1995.

Moody's said in a release that Bonneville's "ongoing efforts to curb operating costs and [the] final 1994-95 rate case are key" to its rating evaluation.

A Fitch release says that Bonneville's attempts to improve its strategic position in the utility industry also could produce favorable results over the longer term.

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