Fitch Affirms Genesis Solar LLC's $852MM Total Trust Ctfs and Bank Facilities; Outlook to Positive
--$561.6 million ($321.6 million outstanding) 3.875% series A trust certificates (U. S. Sovereign Guaranteed) due 2038 at 'AAA'; Outlook Stable;
--$120 million ($44.8 million outstanding) floating--rate bank facility (U. S. Sovereign Guaranteed) due 2019 at 'AAA'; Outlook Stable;
--$140.4 million ($80.4 million outstanding) 5.125% series B trust certificates (Non-Guaranteed) due 2038 at 'BBB+'; Outlook revised to Positive from Stable;
--$30 million ($11.2 million outstanding) floating rate bank facility (Non-Guaranteed) due 2019 at 'BBB+'; Outlook revised to Positive from Stable.
The affirmation of Genesis Opco's notes is based on the project's fully contracted output with an investment-grade offtaker and a strong projected financial profile with an average debt service coverage ratio (DSCR) of 2.42x under Fitch's rating case analysis. The parabolic trough technology is proven and the sponsor-affiliated operator is experienced, but actual operating history is limited and may fluctuate. The Outlook Positive on the non-guaranteed debt is linked to the offtaker, rated 'BBB+'/Outlook Positive, which caps the ratings on these debt facilities.
KEY RATING DRIVERS
Stable Revenue Stream (Revenue Risk Price: Stronger): The rating is anchored by stable revenues from a strong, long-term, fixed-price, power purchase agreement (PPA) with an investment-grade utility, Pacific Gas & Electric Company (PG&E, rated 'BBB+'/Outlook Positive). The PPA does not allow for economic curtailment and contract termination risk is low.
Adequate Solar Resource (Revenue Risk Volume: Midrange): Total generation output in Fitch's rating case includes one-year P90 electric generation to mitigate the potential for lower-than-expected solar resource. In accordance with Fitch's criteria for investment-grade solar projects, the project is able to meet debt obligations under a one-year P99 generation scenario, with DSCRs exceeding 1.0x after 2017.
Limited Cost History (Operation Risk: Midrange): The project utilizes proven solar parabolic trough technology, largely similar to the Solar Energy Generating Systems (SEGS) technology, with which the sponsor has over 20 years of operating experience. The sponsor's experience helps to reduce operating risk but actual operating history for Genesis is limited, although early results are consistent with expectations.
DOE Guarantee for 80% of the Issued Debt (Debt Structure Opco Guaranteed tranches: Stronger; Non-guaranteed tranches: Midrange): The guaranteed series A certificates and floating rate bank term loan benefit from a guarantee from the U. S. Government (rated 'AAA'/Outlook Stable). The ratings reflect the certainty of timely debt service payments provided by a loan guarantee from the U. S. Department of Energy (DOE) for 100% of principal and interest on those guaranteed portions of the debt. The Opco debt structure is otherwise conventional as it is fully amortizing and includes a six-month debt service reserve (DSR). There is a cash sweep mechanism to amortize the bank loan tranches in three years.
Strong Financial Coverage: Under Fitch's base case, which incorporates P50 generation, 2% generation reduction, floating interest rate stress and inflation of 1.50%, Opco DSCRs average 2.84x with a minimum of 2.22x. Under Fitch's rating case, which incorporates P90 generation and increased costs, Opco DSCRs average 2.42x with a minimum of 1.94x.
Comparable to Peers: While Genesis is the only solar thermal power project that Fitch rates, its ratings on the non-guaranteed debt are consistent with natural gas plant Orange Cogen ('BBB+'/Outlook Stable). Both benefit from contracted revenues and strong rating case DSCRs averaging 2.42x and 3.13x for Genesis and Orange Cogen, respectively. Midland Cogeneration Venture LP's ('BBB-'/Outlook Stable) is more exposed to volume and fuel price risk and has lower coverage ratios averaging 1.45x.
Positive: A rating upgrade of the PPA offtaker, which has an Outlook Positive, would result in an upgrade of the non-guaranteed debt.
Negative: Counterparty Risk: A downgrade of the U. S. sovereign rating would result in a commensurate downgrade on loan guarantees for 80% of the rated debt. A rating downgrade of PG&E below the project rating would result in a commensurate downgrade of Genesis.
Negative: Decline in Cash flow: Energy output or solar resource persistently below one-year P90 projections could result in a negative rating action. An increase to operating costs that exceeds 10% of the original projections could result in a downgrade, especially under a low production scenario.
SUMMARY OF CREDIT
The project consists of two, distinct 125 MW solar fields (Unit 1 and Unit 2) which were built in succession. The project is owned and operated by NextEra Energy Resources LLC, an indirect subsidiary of NextEra Energy, Inc.
The 2015 DSCR was strong at 2.35x for Opco debt and 1.75x for consolidated debt including holding company debt. The above-forecast financial performance was driven by a 6% increase in revenues over Fitch's base case due to the solar resource that was about 5% above budget and high plant availability. Revenues in 1Q16 were 14% above budget.
Operating performance in 2015 was strong with total generation output 6% above Fitch's base case electric generation forecast, high average annual availability at 98% and a 28.3% capacity factor that was in line with expectations. Solar field components had a low breakage rate of 0.09% in 2015, lower than the modest 0.14% experienced in 2014. Plant availability in 1Q2016 was adequate at 94% (compared to 92.6% in Fitch's rating case) due to a two-week planned outage, which was delayed from 2015. Strong output continued in 1Q16 with electric generation exceeding budget by 22% due to higher solar resource.
The project has experienced insignificant curtailment to date but may experience increased curtailment between 2017 and 2018 if SCE's transmission upgrades for the West of Devers project are approved. Fitch expects the impact of potential curtailment to be manageable as the project has sufficient cash flow resilience to withstand this temporary period of potential curtailment. Under an extreme stress of 30% reduction to generation, the project can generate base case Opco DSCRs averaging a robust 1.82x.
Genesis continues to make progress in addressing various legal and cultural matters. Genesis received a favorable summary judgement in July 2014 and subsequent appeal of a lawsuit initiated in 2010 by California Renewable Energy (CARE) and LaCuna de Aztalan was dismissed in May 2016. The groups' subsequent petition for rehearing is still outstanding.
Genesis has nearly completed execution of mitigation plans regarding Native American artifacts that were found on the project site. Mitigation plans for land erosion are still under consideration by government agencies.