Fitch Affirms Continental Wind, LLC's Notes at 'BBB-'; Outlook Stable
The affirmation reflects CW's past and projected financial performance, which remains consistent with Fitch's original base case projections. Annual debt service coverage ratios (DSCRs) have averaged 1.70x over the past two years. The project has maintained a stable operational profile with strong availability factors and level operating and maintenance (O&M) expenses. Declining curtailment and geographical diversification have stabilized cash flow with portfolio-wide energy output around P50 levels. The project rating is anchored by long-term power purchase agreements (PPAs), limited merchant exposure, experienced operators, and a robust wind resource across a diversified portfolio.
KEY RATING DRIVERS
Largely Contracted Revenues - Revenue Risk - Price: Midrange
The projects have fixed-price, 20-25-year PPAs for all energy produced, subject to maximum delivery provisions for three Michigan-based projects and the Michigan Midwest Independent System Operator's (MISO) Dispatchable Intermittent Resources (DIR) program. Any energy in excess of the PPA requirements is sold at market prices. Unbundled PPA renewable energy credits (RECs) are sold at fixed prices and protected by favorable change in law provisions. Eligible production tax credits (PTCs) are sold to Exelon Corporation ('BBB'/Stable Outlook) at published PTC prices, introducing additional revenue risk.
Manageable Operating Risk - Operating Risk: Midrange
The wind turbine technologies employed by the CW projects are generally considered proven. However, some of the turbine models have experienced component issues in their respective fleets, which the independent engineer considered typical and correctable, as evidenced by a recent turbine failure and recovery. Further, component issues are covered under warranty or service agreements and generally considered in production loss factors and cost estimates.
Diverse Wind Resource - Revenue Risk - Volume: Midrange
The original energy production assessments were generally completed with an amount and quality of data consistent with industry standards. The diversity of 13 project sites with multiple wind regimes helps to mitigate collective wind resource volatility. Production forecasts were prepared using post-completion data, which Fitch considers relatively more reliable, and are supported by actual performance.
Conventional Debt Structure - Debt Structure: Midrange
The fixed-rate, fully amortizing debt is sculpted to account for the expiration of PTCs, roll-off of PPA RECs, and PPA maturities. Equity distribution and additional debt provisions are typical of similarly rated wind projects. All reserves have been funded with letters of credit that are pari passu to the senior secured notes.
Investment-Grade Financial Profile
Base case DSCRs average 1.77x with a minimum of 1.66x. The Fitch rating case combines lower energy output and availability with a higher cost profile resulting in average and minimum DSCRs of 1.38x and 1.33x, respectively, which are slightly above Fitch's minimum investment grade threshold of 1.30x.
CW's average DSCRs under Fitch's rating case scenario are in line with comparably rated wind farms. Caithness Shepherds Flat ('BBB-'/Stable Outlook) has an average DSCR of 1.42x with a minimum of 1.33x under rating case conditions. Alta Wind ('BBB-'/Stable Outlook) is projected to have a more variable coverage profile, with an average of 2.52x and a minimum of 1.20x.
Negative: Operating performance shortfalls and/or low wind resources that result in DSCRs persistently at or below the rating case minimum of 1.30x may result in a rating downgrade.
Positive: Continued strong financial performance could moderate rating case stresses and result in a financial profile consistent with a higher rating.
SUMMARY OF CREDIT
Continental Wind is composed of 13 operating wind projects, totaling 666.9 MW of installed capacity, located in six U. S. states with multiple wind regimes. The wind projects were placed in commercial operation between May 2008 and December 2012 using eight turbine models from five manufacturers.
CW's financial performance is generally consistent with Fitch's base case projections, with 2014 and 2015 DSCRs at 1.73x and 1.67x, respectively. The DSCR in July 2016 was 1.86x, but Fitch expects by year-end that it will be more in line with management's budget of just over 1.50x. Financial performance in 2015 was driven by strong operating performance, lower curtailment, energy output around the P50 level and stable O&M costs in-line with projections.
CW's portfolio-wide availability has consistently exceeded 98% with low forced outage rates.
A first quarter 2016 (1Q16) incident resulting in collapse of one turbine and a temporary (i. e. seven hours to four days) shutdown of the remaining 31 turbines at Harvest I wind farm in Michigan has not adversely affected overall plant availability and is in process of being resolved with the manufacturer, Vestas. Fitch will continue to monitor management's remediation efforts and their impact on operating performance. To date, the potential impact to the project's cash flow is negligible.
Total energy output in 2015 was 0.2% higher than the P50 budget level and 0.6% below the P50 level in 2014. Above-budget energy production at the Michigan Wind II and Harvest II projects more than offset shortfalls at other locations, and below-budget curtailment buoyed portfolio-wide energy output in 2015. Portfolio-wide curtailment, which previously had a material impact on delivered energy volumes, decreased throughout 2015 and 2016 to nearly zero percent from a high of 11% in 1Q14.
Management reports that wind speeds in 2015 were about 3%-7% lower than the three-year averages in the respective regions of the wind farms. The large and diverse portfolio of wind power assets mitigates the risks of underperformance at individual sites. While 1Q16 output was 4% above budget, Fitch expects to see annual output near P50 levels due to seasonality effects.
Fitch has not altered its base case and rating case expectations, as CW's performance remains in line with Fitch's original projections.
The collateral consists of a first priority security interest in all tangible and intangible assets of the issuer and its project companies, as well as a pledge of Continental Wind Holding, LLC's membership interest in CW. CW is restricted from selling any assets material to the operation of any project, subject to the terms of the permitted asset sale provision. Fitch notes that any proceeds from permitted asset sales, except non-material assets up to $25 million, must be used to redeem a portion of the notes.
In addition, Exelon Corporation has entered into a tax equity put option exercisable by lenders upon acceleration and equity foreclosure of CW. The put expires upon the earlier of 2023 or the expiry of PTCs, and requires that the off-taker pay the net present value of 99% of any PTCs earned and 5% of distributable cash flows under a one-year P90 estimate using a 15% discount rate. Fitch believes that the put option proceeds are sufficient to fully repay any PTC-related debt outstanding in all years.