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Fitch Rates Boise Kuna Irrigation District, Idaho's Arrowrock Hydroelectric $41MM Proj Revs 'BBB+'

SAN FRANCISCO-(Business Wire)-September 4, 2008 - Fitch Ratings assigns its 'BBB+' rating to the $41 million Boise Kuna Irrigation District, ADA and Canyon Counties, Idaho's Arrowrock Hydroelectric project revenue bonds, Series 2008A. The bonds are expected to price on September 25 in a negotiated sale. The Rating Outlook is Stable.

The 'BBB+' rating reflects construction risk, which is borne by bondholders, associated with the building of the 15 MW Arrowrock Hydroelectric Project. Fitch's view is that construction risk is limited but presents a distinct difference in the level of security provided to bondholders as compared to the risks after project completion in 2010, at which time a limited take-or-pay agreement with the power purchaser, Clatskanie People's Utility District, goes into effect. The rating will be reviewed at the time of commercial operation for possible upgrade to reflect the change in security for bondholders.

Following commercial operation of the project, Clatskanie has a limited take or pay obligation that will require Clatskanie to may payments sufficient to pay O&M and debt service on the project. Notably, the District's take or pay is limited in that its obligation is subject to suspension in two instances (noted below in the fourth bullet). Fitch views the likelihood of these events as remote although bondholders do take operational risk of the project in these instances.

The 'BBB+' rating is supported by the following credit characteristics:

—Pledged revenues consist solely of project revenues of the new 15 MW hydroelectric project to be constructed at the existing Arrowrock dam, owned and operated by the Bureau of Reclamation. The bonds are non-recourse to the Boise Kuna District and four other irrigation districts that will construct and own the hydroelectric project.

—Bondholders take construction risk of the project. No party is obligated to pay debt service until the project has reached commercial operation, which is expected to occur in 2010. If the project is continuously delayed and never reaches commercial operation, which Fitch considers to be remote, there are no available funds to pay debt service beyond funds that may remain in the construction fund and debt service reserve fund.

—Fitch views the mitigation efforts taken to reduce construction risk as sufficiently supportive of its 'BBB+' rating on the bonds. Mitigation efforts include the use of two fixed price contracts with limited opportunities for price escalation, contingency reserves sized to handle capitalized interest and potential cost escalation, the use of contractors with experience in this type and size of project in the region, and a short construction timeline (best case - 16 months; Fitch's expected case - 26 months).

—Following commercial operation, the Clatskanie People's Utility District, Oregon (the power purchaser) shall have an obligation to make payments sufficient to meet O&M and debt service obligations, with only two limitations. The two events which shall suspend Clatskanie's obligation to pay are; 1) non-operation of the project for two consecutive years, or 2) severely limited generation for four consecutive years (with the minimum threshold set at hydrological flows that have never been experienced at Arrowrock dam in its 83 years of recorded flows). Fitch views these operating risks as sufficiently remote for the rating category.

—Clatskanie People's Utility District is a retail electric utility in northwestern Oregon. The utility purchases the majority of its power from the Bonneville Power Administration (rated 'AA-'; Positive Outlook) and serves a highly concentrated customer base, with 90% of its revenues coming from one industrial customer, Georgia Pacific. The customer concentration is tempered by the terms of the districts purchase power contract with Bonneville, the district's low (below market) rates, and the customer's longevity in the region.

Construction Timeline

Boise Kuna has entered into two fixed price design/build construction contracts for the Arrowrock Hydroelectric Project. The turbine contractor (Riverside, Inc.) will provide the two 7.5 MW turbine generators to the project while the powerhouse contractor (Mt. States) will be responsible for construction of the powerhouse. The powerhouse will be built at the base of the existing Arrowrock dam, connecting the powerhouse to the outlet pipes that already run through the dam, installation of the turbines, and an upgrade of existing transmission lines. Both contractors and a number of subcontractors have experience with similarly sized hydroelectric projects in the northwestern United States. Construction is scheduled to begin in October 2008. The contracts contemplate a successful completion date of June 6, 2010. However, all parties, including the two contractors, are working based on timelines that contemplate and early completion date in November 2009.

Project construction will be constrained by a tight construction window at the site. The Lucky Peak Reservoir (the reservoir located downstream from the Arrowrock dam) water level is below the powerhouse construction site only during the winter months. Even a slight delay from the initial scheduled start date of October 2008 could result in a multiple month delay for commercial operation if construction of the powerhouse is not substantially complete by April 2009, when the water level in the Lucky Peak Reservoir begins to come back up to higher levels for the summer months. While the project has obtained all licenses and permits, it is still dependent on receipt of Bureau of Reclamation and FERC approvals for each of the four construction phases, as they occur. Fitch focused its analysis on a scenario where commercial operation is delayed to December 2010. Reserves, including capitalized interest, are more than sufficient to handle the delay, should it occur.

Fore more detailed information regarding the Arrowrock Hydroelectric Project, the planned construction timeline, contract provisions, expected operations, and the power purchaser, please refer to Fitch's forthcoming new issue report, which is expected to be published the week of Sept. 15, 2008.

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.

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