Fitch Affirms Energy Northwest (WA)'s Wind Project Rev Bonds at 'A-'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed the following Energy Northwest wind project revenue bonds at 'A-':

--$94.2 million nine canyon wind project revenue and refunding bonds series 2012, 2014 and 2015.

SECURITY

Bonds are secured by a net revenue pledge of the entire nine canyon wind project, which consists of three phases. However, each phase (and bond series) is separately secured by a unique group of municipal power purchasers, although certain purchasers are involved in multiple phases.

KEY RATING DRIVERS

PURCHASER CREDIT QUALITY: The rating reflects the credit quality of the largest project participants in each phase but also across the entire project, given the collective payment of project operating and maintenance costs prior to the pledge of net revenues. The largest participants include: Douglas County public utility district (PUD), Grays Harbor County PUD (rated 'A'), Franklin County PUD, Grant County PUD (rated 'AA') and Okanogan PUD.

UNCONDITIONAL TAKE-OR-PAY CONTRACTS: The wind project bonds are secured by payments made pursuant to absolute and unconditional take-or-pay power purchase agreements (PPAs) with 10 Washington-based public utility districts. The PPAs extend for the life of the bonds.

STEP-UP PROVISION: The 25% step-up provisions apply only within each of the three respective phases of the project and participants within that project. The step-up provides protection to bondholders from a default by one or more project participants that account for 20% or less of the project phase.

CREDIT RISK ACROSS PROJECT: Fitch rates all three series of bonds the same, despite the different mix of project participants. Bonds are secured by a pledge of net revenues of the project, which places project participants at risk in the event of non-payment of operating expenses by participants not involved in their phase of the project.

ROBUST RESERVES; MODEST MARGINS: Robust reserves, equal to $18.1 million at the end of fiscal 2016 or 687 days cash, help to mitigate the risk of operating costs that would not be fully recovered by the step-up in the event of a default by a project participant with a share of any project greater than 20%. Financial margins are typical for a joint action agency project, with Fitch calculated debt service coverage of 1.13x in fiscal year 2016.

RATING SENSITIVITIES

CHANGE IN COUNTERPARTY RATINGS: The long-term rating of the Energy Northwest nine canyon wind project bonds will continue to be determined by Fitch's assessment of the credit quality of the purchasing municipal utilities and the magnitude of their obligations. Therefore, material shifts in the rating or credit quality of purchasing utilities below the current rating on the bonds could result in a downgrade. Conversely, shifts in the rating or credit quality of all of the utilities above the current rating on the bonds would result in an upgrade.

CREDIT PROFILE

The Nine Canyon Wind Project is a project developed by ENW to provide renewable energy to 10 public utility districts in the state of Washington. The project consists of 63 wind turbines totaling 95.9 MW of capacity that were completed in three phases between 2002 and 2008. The turbines are located in Benton County, WA on land that is leased beyond the final repayment of the bonds. Production has been healthy with an average capacity factor of 28% or higher during four of the past five years.

UNCONDITIONAL CONTRACTUAL COMMITMENT AND STEP-UP PROVISIONS

The rating on the bonds reflects the security provisions of the long-term PPAs between ENW and each project participant that extend through the life of the bonds. The PPAs for each phase are unconditional. As such, they obligate the purchasers to pay their portion of the debt service regardless of the operational status of any of phases that make up the project. To mitigate participant default risk, the transaction includes a step-up provision (25%) for fixed and variable costs. The bonds are not secured by an ownership interest in the wind turbines.

The PPAs define specific events that allow for the project to be terminated in the event of large cost increases (payment cap) or failure of the project to operate for over one year and agreement by the majority of the project participants to terminate. However, purchasers remain obligated to pay debt service, in the event of project termination.

SOLID CREDIT QUALITY OF PARTICIPANTS

The current rating broadly reflects the credit quality of the largest participants. The power purchasers and their overall shares of the Wind System projects in aggregate are as follows:

--Grays Harbor County PUD No. 1 (20.9%; rated 'A');

--Okanogan County PUD No. 1 (16.6%; not rated by Fitch);

--Grant County PUD No. 2 (12.5%; rated 'AA');

--Franklin County PUD No. 1 (10.5%; not rated);

--Douglas County PUD No. 1 (10.2%; not rated);

--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%; not rated);

--Mason County PUD No. 3 (3.2%; not rated);

--Cowlitz County PUD No. 1 (2.1%; rated 'A').

CREDIT RISK ACROSS PROJECTS

ENW receives revenues from the project participants in accordance with the PPAs that obligates each purchaser for only its share of debt service and operating costs for the phases of the project in which it participates. In the example of Phase III debt service, Okanogan PUD does not pay debt service related to the series 2015 bonds since it is not a participant in Phase III. Operating costs of the project are spread across the three phases.

However, all bondholders have exposure to project participants over 20% of any of the three phases, which includes: Okanogan PUD, Grant PUD, Douglas PUD, Grays Harbor PUD and Franklin PUD. Given the net revenue pledge that secures bondholders, the default by any one of these project participants leaves a portion of operating and maintenance costs (and debt service specific to that phase) that would not be recovered by the 25% step-up. ENW's robust liquidity could mitigate the immediate shortage in revenues to coverage operating and maintenance costs in the event of a participant default. Nonetheless, Fitch rates the projects with one common rating, given the net revenue pledge and risk across phases of a shortfall in operating and maintenance expenses that could necessitate the use of project reserves.

HEALTHY PROJECT OPERATIONS; AVERAGE COST ABOVE MARKET

Generation output at the wind project has been healthy since completion. Availability of the project was 99.3% in fiscal 2016. Production costs remain higher than originally anticipated reflecting the loss of federal renewable energy production incentive (REPI) payments after fiscal 2010. Capacity factors were 29.9% and 24.0% in fiscals 2016 and 2015, respectively. This resulted in an average cost per kWh to participants of 6.07 cents/kWh and 8.31 cents/kWh, respectively. The average cost of production declined in fiscal 2016 due to favorable wind conditions and lower operating expenditures.

Participants are obligated to pay project costs regardless of operations and market alternatives. However, project costs of between six and eight cents per kWh are above current energy prices in the region. The project provides additional value to certain purchasers given its renewable status. Overall costs are expected to remain level while cost per kWh will vary with annual wind conditions.

ROBUST LIQUIDITY; MODEST DEBT SERVICE COVERAGE

ENW operates the project on a cost basis, collecting rates that are sufficient to pay costs (including debt service). However, given very strong cash reserves at the project, ENW began using modest amounts of this cash to pay a portion of debt service on Phase III in fiscal 2013, when debt service costs increased. This decision was made in consultation with the project participants to balance rate increases and the planned spend down of reserves.

In fiscal 2016, Fitch calculated debt service coverage was 1.13x. At the end of fiscal 2016, unrestricted cash totaled $18.1 million (687 days operating cash). Outstanding debt totaled $29.8 million for Phase I (series 2014), $9.5 million for Phase II (series 2012), and $54.9 million for Phase III (series 2015). The Phase I and II debt matures in 2023 while the Phase III debt matures in 2030. Debt levels continue to exceed the net value of the project, resulting in negative equity levels. This is common for single asset public finance projects financed entirely with debt.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/site/re/864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014982

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014982

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Street, Suite 2020
Austin, TX 78701
or
Secondary Analyst
Lina Santoro
Analytic Consultant
+1-212-908-0522
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
Fitch Ratings, Inc.
111 Congress Street, Suite 2020
Austin, TX 78701
or
Secondary Analyst
Lina Santoro
Analytic Consultant
+1-212-908-0522
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com