RPT-Fitch rates Energy Northwest, WA's Wind Project Revs, series 2014 'A-'

Wed Dec 18, 2013 9:03am EST

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Dec 18 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings assigns its 'A-' rating to Energy Northwest's (ENW) approximately $36.4 million wind project revenue bonds, series 2014.

Bonds are expected to be sold through negotiation the week of Jan. 6, 2014. Proceeds will be used to refund outstanding series 2005 bonds for level savings. The series 2014 bonds will have a debt service reserve fund.

Fitch also affirms its outstanding 'A-' rating on the parity wind project revenue bonds, series 2005, 2006, and 2012. The series 2005 bonds will remain outstanding until the call date of July 1, 2014.

SECURITY

Bonds are secured by a net revenue pledge of the wind project, which consists of three phases. Each phase is separately secured by a unique group of municipal power purchasers, although certain purchasers are involved in multiple phases.

KEY RATING DRIVERS

UNCONDITIONAL 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 bonds.

PURCHASER CREDIT QUALITY: The rating reflects the credit quality of the largest project participants, as the step-up provision is sufficient to cover the default risk of the smaller participants.

COMBINED PROJECT RISK: The 25% step-up provisions apply only to each of the respective phases of the project and participants within that project. However, Fitch rates all three series of bonds the same, based on the combined participant payments for operations and the net revenue pledge to bondholders.

SUFFICIENT FINANCIAL PERFORMANCE: Financial metrics are in-line with 'A-' rated joint action agency projects, with debt service coverage of 1.17 times (x) in fiscal year 2013 and very strong unrestricted cash reserves (at 506 days operating cash).

STRONG OPERATIONS: The Nine Canyon wind project consists of a 95.9 megawatt (mw) capacity wind generation project. The project's 63 turbines became operational between 2002 and 2008. Production has been strong and consistent with an average capacity factor of 28% or higher.

HIGHER PROJECT COSTS: The cost of project output is higher than originally anticipated due to the loss of federal renewable energy production incentive (REPI) payments. Participants began paying higher costs in 2008 and cost per kWh, depending on annual output, is expected in the $70-$80 range over the next few years. Given recent softer overall market prices for energy in the Northwest, the project is not competitively priced, although it has additional value to certain purchasers given its renewable status.

RATING SENSITIVITIES

CHANGE IN PARTICIPANT CREDIT QUALITY: A material change in the credit quality of the purchasing municipal utilities could impact the project's debt rating.

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.

UNCONDITIONAL CONTRACTUAL COMMITMENT AND STEP-UP PROVISIONS

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 are unconditional and 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.

STRONG 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 );

--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').

HIGHER COST OF PRODUCTION

Generation output at the wind project has been solid since completion, but production costs remain higher than originally anticipated reflecting the loss of federal renewable energy production incentive (REPI) payments after fiscal 2010. Capacity factors were 28% and 32% in fiscals 2013 and 2012, respectively, which resulted in an average cost per kWh to participants of 7.9 cents/kWh and 6.7 cents/kWh, respectively. The average cost of production rose in fiscal 2013 reflecting a scheduled increase in debt service payments.

Participants are obligated to pay project costs regardless of operations and market alternatives. However, weaker wholesale energy prices in the northwest have been below the average project cost in recent years. Furthermore, the premium on wind energy in the Pacific Northwest has declined with the California renewable legislation placing a preference on in-state generation.

SUFFICIENT FINANCIAL PERFORMANCE

ENW operates the project on a cost basis, collecting rates that are only sufficient to pay costs, including debt service. Financial performance has therefore been modest, with 1.07x debt service coverage in fiscal 2012, and 1.13x in fiscal 2011. Fiscal 2010 debt service coverage was higher at 1.66x, but reflected no scheduled principal payment in that year.

Fiscal 2013 coverage was slightly higher at 1.17x, reflecting collection of revenues to support the $2 million increase in principal payments due July 1, 2014 (the first day of fiscal 2014). The increase in debt service was structured during the 2006 bond issue. The higher debt service will continue through fiscal 2023 when the series 2005 and 2012 bonds mature. ENW is not projecting any new financing needs for the next three years.

Liquidity is healthy with $9.6 million at the end of fiscal 2013, or 506 days cash on hand. The high days cash calculation reflects low operating costs of $7 million in relation to the project's fixed debt costs of $13.1 million. The cash reserves provide some protection against unexpected maintenance issues. Small amount of cash may be spent down over the next couple of years to offset the cost to participants of the project.

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