Fitch Rates Energy Northwest Wind Project Series 2006 'A-'.

NEW YORK -- Fitch Ratings assigns an 'A-' rating to Energy Northwest's $68 million wind project revenue bonds, series 2006. The Rating Outlook is Stable. Fitch also affirms the 'A-' rating on the outstanding 2001, 2003 and 2005 wind project revenue bonds. Proceeds of the 2006 bonds will be used to fund the construction of Phase III of the Nine Canyon Wind Project (the Wind Project). The 2006 bonds will be priced the week of Dec. 11, 2006 by Prager, Sealy and Co., LLC.

The Nine Canyon Wind Project is a separate system of Energy Northwest created to sell energy to various public utility districts in the State of Washington. The Wind Project is currently divided into two phases, Phase I which consists of 37 wind turbines with an aggregate generating capacity of approximately 48 megawatts (mw) and Phase II made up of 12 wind turbines with a generating capacity of approximately 16 mw. Phase I became commercially operable in September 2002 and Phase II began operation in December 2003. The third phase (Phase III) will consist of 14 wind turbines totaling 32 mw of capacity and is expected to become fully operational in early 2008.

Each Wind Project phase has separate groups of power purchasers and separately issued debt. Certain utilities are involved in more than one phase. Each Wind Project phase has a separate group of power purchasers who are only legally committed for the debt service of the phase or phases in which they are involved. Operating costs for all phases are spread across all purchasers based upon their output of the Wind Project.

The bonds are secured by net revenues of the Wind Project System, which consists of all three phases. The rating on the 2006 bonds reflects the sound security provisions of its long-term power sale contracts, the creditworthiness of the contractually obligated purchasers, and the increasing value of renewable energy sources in the region. Credit concerns center around that most of the Wind Project purchasers' credit profile and financial strength are significantly dependent on hydro conditions in the Northwest.

Bondholders of the 2006 bonds are primarily secured by the purchase obligations of the five participants in Phase III through long-term contracts that extend through the life of the bonds. The power purchasers and their respective shares of the Phase III Wind System project are as follows:

Grays Harbor County PUD No. 1 (37.52%); Franklin County PUD (25%), Benton PUD (18.63%); Lewis County PUD No. 1 (15.71%); and Mason County PUD No. 3 (3.14%).

The power sale contracts obligate the purchasers to pay their portion of the 2006 debt service regardless of the operational status of any of phases that make up the 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 2006 bonds are also secured by a debt service reserve fund (equal to one year's debt service on all Wind Project bonds) and other operating reserves. If these reserves are drawn down, management expects to raise rates and charges to members to pay all financial obligations, maintain required reserves and continue to have a reasonable level of liquidity.

Fitch recognizes that the creditworthiness of Phase I and Phase II purchasers has some impact on the credit profile of the 2006 bonds. A default by Phase I or Phase II purchasers involving more than 20% of the respective phase's debt service could cause a deficiency in funds available to pay debt service and require draws on the debt service reserve fund. In aggregate, Fitch believes the purchasers associated with the Wind System are a diverse and good quality mix of utilities. The power purchasers and their respective shares of the Wind System projects in aggregate are as follows:

Grays Harbor County PUD No. 1 (20.89%); Okanogan County PUD No. 1 (16.61%); Grant County PUD No. 2 (12.54%); Franklin County PUD No. 1 (10.49%); Douglas County PUD No. 1 (10.23%); Benton PUD No. 1 (9.39%); Chelan County PUD No. 1 (8.3%); Lewis County PUD No. 1 (6.32%); Mason County PUD No. 3 (3.14%); and Cowlitz PUD No. 1 (2.09%).

Fitch also recognizes that the recently passed renewable portfolio standard in the State of Washington enhances the value of the Wind Project to the purchasers. In addition, the cost of the energy to the purchasers has been near past projections (although Fitch notes that lower than expected operating costs have compensated for lower than expected federal energy credits and wind conditions).

Fitch realizes that there is some uncertainty surrounding the amount of future Department of Energy Renewable Energy Production Incentive (REPI) payments available to the Wind Systems projects. Since 2003, Energy Northwest has received declining proportions of its claimed amount (100% for 2002 to 44% for 2005). Nevertheless, given the small size of the REPI payments relative to the overall cost of the Wind Project and the small amount of power the Wind Project contributes to most of the members' overall power supply mix, Fitch does not view this development as a major credit risk.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.