NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign a 'BBB-' rating with a Stable Outlook to approximately $635 million of proposed senior secured notes to be issued by Continental Wind, LLC (CW or the portfolio).
The final ratings are contingent upon the receipt by Fitch of executed documents and legal opinions conforming to information already received and reviewed as well as the final pricing of the bonds. The proceeds will be used by CW to make a distribution to the sponsor, Exelon Generating Company, LLC(IDR rated 'BBB+' with a Stable Outlook).
KEY RATING DRIVERS
--Largely Contracted Revenues: The portfolio projects have entered into
fixed-price, 20- to 25-year power purchase agreements (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 will be 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) will be sold to Exelon Corporation at published PTC
prices, introducing inflation price risk. The Michigan- and Kansas-based
projects are subject to heightened curtailment risk, but the Shooting
Star PPA provision, transmission upgrades, the IE estimated curtailment
loss factors, and Fitch production stresses help account for potential
shortfalls in delivered energy.
Revenue Risk - Price: Midrange
--Diverse Wind Resource: The energy production assessments were
generally completed with an amount and quality of data consistent with
the industry standard. Fitch believes that the diversity of 13 project
sites with multiple wind regimes helps to mitigate collective wind
resource volatility. However, the portfolio effect is unproven and
limited actual data is available to validate estimates. Fitch concludes
that a portfolio benefit is likely present, but the extent remains
Revenue Risk - Volume: Midrange
--Manageable Operating Risk: The wind turbine technologies employed by
the CW projects are evolutionary designs and generally considered to be
proven. However, some of the turbine models have experienced component
issues in their respective fleets, which the IE considers to be typical
and correctable. Further, component issues are covered under warranty
and generally considered in production loss factors and cost estimates.
Operation Risk: Midrange
--Conventional Debt Structure: 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 will be
funded with letters of credit that are pari passu to the senior secured
Debt Structure: Midrange
--Investment-grade Financial Profile: Fitch views financial performance
in the Fitch rating case to be consistent with an investment-grade
rating. The Fitch rating case combines lower energy output and
availability with a higher cost profile resulting in average and minimum
debt service coverage ratios (DSCRs) of 1.38x and 1.33x, respectively.
Debt Service: Midrange
--Production Shortfalls: Persistently lower than estimated energy production and lower DSCRs may lead to a downgrade.
--Operational Challenges: Decreased project availability or an inability to effectively manage operating & maintenance costs and DIR charges resulting in DSCRs below 1.3x may lower the rating.
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, will be used to redeem a portion of the notes.
In addition, Exelon Corporation will enter into a tax equity put option exercisable by lenders upon acceleration and equity foreclosure of CW. The put expires on the earlier of 2023 or the expiry of PTCs, and requires the off-taker pay the net present value of 99% of any PTCs earned and 5% of distributable cashflows 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.
The portfolio is comprised 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 have been placed in commercial operation between May 2008 and December 2012 using eight turbine models from five manufacturers.
The Fitch base case represents Fitch's expected performance for CW. The Fitch base case uses the P50 energy production estimates without further energy production haircuts. A PTC price of $23 per MWh, plus inflationary adjustments, was considered given the terms of the Exelon off-take agreement, current published PTC price, and historical precedence for pricing stability. The terms of the REC off-take agreements were maintained given the contractual obligations of each counterparty. Additionally, where applicable, merchant energy revenues were determined based on the IE's production estimates. The estimated DIR charge was preserved given the 40% cushion to the projects' historical experience. Management's cost profile was maintained based on feedback from the IE and Fitch's review of the cost profiles of comparable projects. The Fitch base case average and minimum DSCRs are 1.77x and 1.67x, respectively.
The Fitch rating case applies a combination of operational and financial stresses to the Fitch base case to reflect potential results that in most circumstances might occur occasionally, but not persist during the life of a project financing. The Fitch rating case results do not reflect typical performance expectations, but a reasonably likely combination of uncorrelated stresses.
The Fitch rating case uses the portfolio P90 production estimate with a 3% production haircut in all years to reflect potential measurement bias, availability issues, additional curtailment, and lower than estimated portfolio effect. REC revenues under non-PPA off-take agreements with unrated counterparties were excluded from the analysis given the potential exposure to the fragmented, variable merchant market and current and anticipated oversupply of tradable RECs in the region. Costs were increased 5% in years 1 - 15 and 10% in years 16+ to account for the uncertainty of long-term cost estimates. The Fitch rating case average and minimum DSCRs are 1.38x and 1.33x, respectively.
Fitch completed additional financial analyses to assess the probability of default, which will be provided in the Fitch presale report.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012)
--'Rating Criteria for Onshore Wind Farm Projects' (April 11, 2013)
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Onshore Wind Farm Projects