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Fitch Affirms Energy Northwest (WA)
Wind Project Bonds at 'A-'

by Staff
Business Wire, October 13, 2009

Windmills and power lines operate near Wasco in Sherman County. The region's electricity grid will need to expand to handle all the new wind and other renewable energy projects being built across Oregon and the West.

As part of its ongoing surveillance efforts, Fitch Ratings has affirmed its 'A-' rating on Energy Northwest's (ENW) approximately $144.7 million in wind project revenue bonds, series 2003, 2005 and 2006. The Rating Outlook for all bonds is Stable.

Bondholders are secured by a net revenue pledge of the Wind Project System which consists of three phases. Each phase has a

separate group of power purchasers, although certain purchasers are involved in multiple phases. Purchasers are only legally committed for the respective fixed costs of the phase or phases in which they are involved. However, based on the net revenue pledge of the Wind Project System as a whole, the rating reflects the risks of the project as a system.

The 'A-' rating reflects the creditworthiness of the contractually obligated purchasers, and the increasing value of renewable energy resources, such as ENW's wind project, in the region. Credit concerns center around the fact that most of the Wind Project purchasers' credit profile and financial strength is significantly dependent on hydro conditions in the Northwest and can fluctuate depending on water flow and market electricity prices. Most of the purchasers manage this exposure through the use of increased financial reserves and the rate flexibility that is needed to weather the more challenging years.

The Nine Canyon Wind Project's financial performance has been affected by the reduction in the amount of Dept. of Energy Renewable Energy Production Incentive (REPI) payments available to the project. Since 2003, Energy Northwest has received declining proportions of its claimed amount (100% for 2002, down to 15% for 2009) as a result of lower appropriations by Congress and more qualifying wind projects in the country. The result has been the use in fiscal 2008 of the remaining reserves that had been initially funded at the project and a very large rate increase to project participants in phases I and II. Nevertheless, the project costs for each phase are projected to remain between $60 and $74 per megawatt hour (MWh) even with the low rate of REPI payments, which is still competitive for renewable energy. Even with the early depletion of reserves, Fitch does not view this development as a major credit risk. Energy Northwest has reacted by allocating the full remaining project cost to the participants and expects to rebuild reserves at the project over the next few years.

The Nine Canyon Wind Project is a project developed by Energy Northwest to provide renewable energy to 10 public utility districts in the state of Washington. The state has a required renewable target of 15% by 2020 and certain of the larger project participants are required to meet the target. The project provides a renewable source of energy, and consists of three phases that became operational between 2002 and 2008. All three phases have a nameplate capacity of 96 megawatts (MW) provided by 63 individual turbines. The turbines are located in Benton County on land that is under long-term leases that exceed the final repayment of the bonds.

The rating on the bonds reflects the security provisions of the long-term power sale contracts between Energy Northwest and each project participant that extend through the life of the bonds. The power sale contracts for each phase obligate the purchasers to pay their portion of the debt service regardless of the operational status of any of the phases that make up the Nine Canyon Wind Project. To mitigate participant default risk, the transaction includes a step-up provision (25%) for fixed and variable costs. Additional bondholder support comes from favorable limitations on the purchasers' ability to assign their Wind Project payment obligations. The bonds are not secured by an ownership interest in the wind turbines.

The power purchasers and their respective shares of the Wind System projects in aggregate are as follows: Grays Harbor County PUD No. 1 (20.9%; rated 'A' by Fitch); Okanogan County PUD No. 1 (16.6%; not rated); Grant County PUD No. 2 (12.5%; rated 'AA'); Franklin County PUD No. 1 (10.5%); Douglas County PUD No. 1 (10.2%); Benton County PUD No. 1 (9.4%; rated 'A'); Chelan County PUD No. 1 (8.3%; rated 'AA+'); Lewis County PUD No. 1 (6.3%); Mason County PUD No. 3 (3.2%); and Cowlitz County PUD No. 1 (2.1%; rated 'A-').

Fitch Affirms Energy Northwest (WA) Wind Project Bonds at 'A-'
Business Wire, October 13, 2009

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