Fitch Rates Energy Northwest, WA's Wind Project Revs 'A-'; Outlook Stable.
The series 2012 bonds are not to exceed $17 million but the final par amount will depend on market conditions. Proceeds will refund outstanding bonds for savings. Bonds are expected to price via negotiated sale during the week of March 26, 2012.
Fitch also affirms the following outstanding ratings for Energy Northwest Nine Canyon Wind Project:
--$16.68 million wind project revenue bonds, series 2003;
--$54.76 million wind project revenue bonds, series 2005;
--$69.33 million wind project revenue bonds, series 2006.
The Rating Outlook is Stable.
Bonds are secured by a net revenue pledge of the Wind Project System, which consists of three phases. Each phase has a separate group of municipal power purchasers, although certain purchasers are involved in multiple phases. Purchasers are committed only for their respective fixed costs of the phase or phases in which they are involved. Debt service on the series 2012 bonds is included in Phase II power purchaser costs. However, based on the net revenue pledge of the Wind Project System as a whole, the rating reflects the net revenues of the project.
KEY RATING DRIVERS
PURCHASERS' CREDIT QUALITY: The rating largely reflects the credit quality of the larger municipal purchasers, as the step-up provision is sufficient to cover the default risk of the smaller participants.
SUFFICIENT FINANCIAL PERFORMANCE: Financial metrics are in-line with 'A-' rated joint action agency systems, with debt service coverage at 1.13 times for fiscal year 2011 and very strong unrestricted cash reserves (at 859 days operating cash for fiscal year 2011).
SOLID PROJECT OPERATIONS: The Nine Canyon wind project consists of a 95.9 megawatt (mw) capacity wind generation project, which was constructed on-time and within budget. The project's 63 turbines became fully operational in May 2008, and by 2011 Nine Canyon had achieved solid capacity (32.5%) and availability factor levels (98%).
TAKE-OR-PAY CONTRACTS: The wind project bonds are secured by payments made pursuant to absolute and unconditional take-or-pay power sale contracts with 10 Washington-based public utility districts, which extend for the life of the bond (2030). Obligations to Energy Northwest (ENW) are paid as operating expenses of each utility, prior to its own debt service.
STEP-UP PROVISION: In the event a purchaser defaults on payments to ENW, the power sale contract also includes a 25% payment step-up provision for the non-defaulting purchasers in each of the three phases of the project. However, the step-up is limited within each of the three phases.
VALUABLE RENEWABLE RESOURCE: The project provides each of the power purchasers with a renewable energy resource which contributes to the state/local renewable energy goals.
LOSS OF REPI CREDITS: Given the federal budgetary concerns, Congress is unlikely to appropriate any further funds to the renewable energy production incentive (REPI) program. The REPI credits (federal grants) historically helped to offset the cost of wind production. ENW revised its wholesale cost of wind to account for this projected and ongoing loss of REPI credits beginning in fiscal 2010.
WHAT COULD TRIGGER A RATING ACTION
CHANGE IN PARTICIPANT CREDIT QUALITY: A material change in the credit quality of the purchasing municipal utilities could impact the project's debt rating.
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 state has a required renewable energy 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. 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 ENW 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 phases that make up the Wind Project. To mitigate participant default risk, the power sale contracts include a step-up provision (25%) for fixed and variable costs. The remaining participants within each phase can be required to increase their payments by 25% to cover a default by a participant in that phase.
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 by Fitch [NR]);
--Grant County PUD No. 2 (12.5%; rated 'AA');
--Franklin County PUD No. 1 (10.5%; NR),
--Douglas County PUD No. 1 (10.2%; NR);
--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%; NR);
--Mason County PUD No. 3 (3.2%; NR);
--Cowlitz County PUD No. 1 (2.1%; rated 'A').
Financial performance of the project has been impacted by the reduction in the amount of Department of Energy Renewable Energy Production Incentive (REPI) payments available to the project. Since 2003, ENW has received declining proportions of its claimed amount (100% for 2002; down to 15% in 2009; and zero thereafter) 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 reserves that had been initially funded at the project and a large rate increase to project participants in phases I and II. Nevertheless, the project costs for each phase are likely to remain in the $65- $80 per megawatt hour (MWh) range, which is still competitive for a renewable energy resource.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'Public Power Rating Guidelines' (March 28, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Public Power Rating Criteria
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|Date:||Mar 20, 2012|
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