Fitch Rates Energy Northwest's Wind Project Bonds 'A-'

NEW YORK--(BUSINESS WIRE)--Dec. 29, 2004--Fitch Ratings has assigned an 'A-' rating to Energy Northwest's $71 million wind project revenue bonds, series 2005. The bonds mature through 2023. Outstanding parity bonds, approximating $4.39 million 2001 bonds and $21.7 million series 2003 bonds, have been affirmed at 'A-' by Fitch. The Rating Outlook is Stable. The 2005 bonds will be priced the first week of January 2005 by Prager, Sealy and Co., LLC. Proceeds will be used to refund $64.22 million of the 2001 bonds maturing on and after July 1, 2007.

The Wind Project is divided into two phases, Phase 1 which consists of 37 wind turbines with an aggregate generating capacity of about 48 megawatts (mw) and Phase 2, made up of 12 wind turbines with a generating capacity of approximately 15.6 mw. Phase 1 became commercially operable in September 2002 and Phase 2 began operation in December 2003. The bonds are secured by the net revenue of the Wind Project System, with revenues derived from energy sales to various public utility districts and to Energy Northwest's Columbia Generating Station from under long-term power purchase agreements.

Project costs benefit from the Department of Energy Renewable Energy Production Incentive (REPI) payments, which are renewable energy credits, recently totaling about 1.8 cents per kilowatt-hour (kwh). Additional security is derived from a debt service reserve and various other reserve accounts; but the bonds are not secured by an ownership interest in the generating facility. Both Phase 1 and Phase 2 have separate groups of power purchasers, who are only legally committed for their respective fixed costs of the Phase 1 and Phase 2 projects. However, variable costs for both phases are spread across all of the purchasers on a percentage basis. Step up provisions (25%) provide additional bondholder protection. Termination of the project does not excuse the power purchasers from having to make their respective financial payments.

Credit strengths include the solid list of power purchasers, the operating status of both phases of the project, the projected reasonable cost of the power (helped by the REPI payments) and the value of the renewable resource to the region. Power production will vary by weather conditions, but the project is expected to operate at around a 31% capacity factor. Cost of power is forecasted from an actual 3.7 cents per kwh in 2004, rising to 3.9 cents in 2008 for Phase 1. Phase 2 ranges from 3.6 cents per kwh in 2004 escalating to 3.8 cents in 2008. The complete loss of the REPI, which is not expected, would increase the cost of power to the mid to high 5 cents per kwh. While this would be somewhat high for the Pacific Northwest, given the small amount of power this contributes to most of the members' overall power supply mix, the likelihood that some amount of REPI will be received and the clean nature of the resource, this is not currently considered to be a major credit risk.

The primary risks appears to center on an extended outage of the wind project and uncertainties surrounding the amount of future REPI payments. The REPI program requires annual Congressional appropriation. Energy Northwest received 100% of the claimed amount in fiscal year 2003 for REPI year 2002, but only 77% of claimed amount in fiscal year 2004 for REPI year 2003. Unpaid amounts are carried over. The project currently has sufficient reserves totaling about $6.6 million, excluding the debt service reserve, incorporated within the reserve and contingency fund, operating reserve, REPI account and revenue fund. If these were to be drawn down, management expects to raise rates and charges to members to meet all financial obligations and still have a reasonable amount of funds on hand. Finally, with a new generating project such as this, which is subject to wind and weather conditions, the ability to forecast its performance with good accuracy is extremely difficult.