Fitch Affirms Shepherds Flat Senior Secured Trust Debt

NEW YORK--()--Fitch Ratings has affirmed the following ratings for Caithness Shepherds Flat, LLC's (CSF or the Project) total $1.2 billion pari-passu project debt:

Shepherds Flat Funding Trust I:

--$420 million series A-1-G senior secured fixed-rate trust certificates at 'AAA'; Outlook Stable;

--$105 million series A-1-a senior secured fixed-rate trust certificates at 'BBB-'; Outlook Stable.

Shepherds Flat Funding Trust II:

--$540 million A-2-G senior secured floating rate loan at 'AAA'; Outlook Stable.

--$135 million A-2-a senior secured floating rate loan at 'BBB-'; Outlook Stable.

The affirmation of the 'BBB-' rating for the non-guaranteed project debt is based on stable financial performance between the Fitch base and rating cases through Q2 2014. The rating is anchored by long-term revenue and operating contracts with a highly rated offtaker and strong operator, partially offset by the potential for decreased generation as a result of curtailment by the offtaker or the interconnection agent. The 'AAA' rating of the guaranteed notes reflects the U.S. Department of Energy guarantee for timely debt service payments.

The Outlook for all debt tranches is Stable.

KEY RATING DRIVERS

Fully Contracted Revenues - Revenue Risk- Price: Midrange

The Project has three fixed-price power purchase agreements (PPAs) with a strong credit quality utility, Southern California Edison (SCE rated 'A-' with a Stable Outlook by Fitch), that effectively mitigate price and volume risk for 100% of the Project's output through debt maturity. The project is exposed to curtailment by the offtaker as well as the interconnection agent, Bonneville Power Authority (BPA rated 'AA' with a Stable Outlook).

Strong Operating Agreements - Operating Risk: Midrange

GE has been responsive in maintaining the availability of the project through the various start-up issues that CSF has faced. GE's operating agreement is currently in place for 10 years, mitigating any operating shortfalls in the medium term. Longer term, there are sufficient replacement operators that can step in following the expiration of the operating agreement.

Variable Wind Resource - Revenue Risk- Volume: Midrange

The wind resource projections and net energy output are largely untested at this greenfield project, and could fall below expected forecasts. Favorably, wind projections are based on an unusually extensive data set that includes six years of on-site wind data helping to reduce forecasting error.

DOE Guarantee for 80% of Project Debt - Debt Structure (Guaranteed): Stronger

The 'AAA' rating for the A-1-G certificates and A-2-G loans reflects the certainty of timely debt service payments due to the U.S. DOE loan guarantee for 100% of principal and interest on the guaranteed debt.

Typical Debt Structure - Debt Structure (Non-Guaranteed): Midrange

The portion of non-guaranteed debt benefits from a typical debt structure for an investment grade wind project, including a six-month debt service reserve, operations and maintenance (O&M) reserve, and a 1.20x distribution trigger. All of the notes have fixed interest rates for the life of the debt, including the A-2 loan which has a floating to fixed rate hedge.

Investment Grade Profile - Debt Service: Midrange

The profile of debt service coverage ratios (DSCR) in Fitch's rating case reflects an average of 1.42x, consistent with investment grade. The minimum 1.33x DSCR indicates the Project has some cushion to withstand lower wind levels in most years and meets the criteria for an investment grade wind project.

Consistent with Peers

Average DSCRs under Fitch's rating case scenario are in line with comparably rated wind farms. Continental Wind (rated 'BBB-' with a Stable Outlook) has average DSCR of 1.38x with a minimum of 1.33x under rating case conditions. Alta Wind (rated 'BBB-' with a Stable Outlook) is projected to have a more volatile coverage profile, with an average of 2.52x and a minimum of 1.20x, partially mitigated by an incremental reserve fund in the back end when coverage is low.

RATING SENSITIVITIES

Negative - Wind resource below P90 projections or operating expenses 15% above sponsor expectations on a persistent basis could result in a downgrade of the non-guaranteed loans.

Negative - Sustained curtailment that reduces cash flows to below the 1.30x debt service coverage level could result in a downgrade of the non-guaranteed loans.

Negative - Any rating action on the U.S. sovereign rating would trigger a rating action on the guaranteed debt.

TRANSACTION SUMMARY

Following several teething issues in 2013 that resulted in reduced generation, the project reached final completion in February 2014. DSCRs have averaged 1.56x for full year 2013 as well as through Q2 2014 according to Fitch calculations. Coverage levels to date demonstrate financial performance between the Fitch base and rating case due largely to decreased production. Fitch views the impact of these start-up issues as well mitigated with sufficient coverage at the current rating.

While actual wind speeds have performed at P50 levels, the project has experienced higher than anticipated curtailment by SCE and BPA. Curtailment has totaled 29,337 MWh through Q2 2014 compared to budgeted curtailment of 440 MWh which represents roughly 1% of generation amounts under the base case. Fitch notes that the project can withstand generation reductions of 35% under base case conditions before reaching breakeven DSCR levels. Curtailment at Shepherds Flat has been the result of scheduled and unscheduled transmission line maintenance, unscheduled flows on various transmission lines and directives under BPA's Dispatch Standing Order 216. The sponsor has been in discussions with the offtaker in order to minimize future curtailments, but has not yet arrived at a solution.

Project availability remains strong through Q2 2014. The guarantee under the amended O&M agreement calculates down time based on a production with a higher threshold. Fitch views this amendment as credit positive since previously, availability was guaranteed at a lower threshold on a time basis.

GE has finished remediation efforts for the blade cracks and all spare parts. In addition, insurance proceeds for the 2013 turbine fire have been received for various consulting expenses and business interruption amounts.

In order to maximize production capabilities, the project has implemented WindRESERVE; a program that allows the turbines to operate up to 2.75 MW periodically but limits the ability of the park to generate above the contracted capacity. The program seeks to limit the effect of downtime at any one turbine and maximize availability of the entire park by allowing slightly higher generation at other turbines. The project is continuing to evaluate the potential increase in production; however, these potential increases have not been included in the projections.

Shepherds Flat Funding Trust I (SFFT-I) and Shepherds Flat Funding Trust II (SFFT-II) are bankruptcy remote trusts, non-recourse to the owners. Together, the trusts issued $1.2 billion total debt which is 80% guaranteed by the DOE. The proceeds of SFFT-I and SSFT-II's debt issues were loaned to CSF to fund a portion of the total $1.9 billion project costs. SFFT-I and SSFT-II reached financial close in December 2010.

CSF is comprised of three wind-powered generation projects with aggregate capacity of 845-MW located along the Columbia River Gorge in Gilliam and Morrow Counties, Oregon. CSF was developed by Caithness, and is owned jointly by Caithness, GE Energy Financial Services, Google Inc., Sumitomo Corporation of America, and Tyr Energy.

SECURITY

The rated debt is secured by a first-priority lien on all CSF assets, revenues, contracts, accounts, and equity ownership.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Onshore Wind Farms Projects' (April 11, 2013);

--'Caithness Shepherds Flat, LLC' New Issue Report (June 1, 2011).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Onshore Wind Farm Projects

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=705018

Caithness Shepherds Flat, LLC

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=634729

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=858655

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Contacts

Fitch Ratings
Primary Analyst
Nicole Czarny
Associate Director
+1-212-908-0684
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew Joynt
Associate Director
+1-212-908-0842
or
Committee Chairperson
Greg Remec
Senior Director
+1-312-606-2339
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Nicole Czarny
Associate Director
+1-212-908-0684
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew Joynt
Associate Director
+1-212-908-0842
or
Committee Chairperson
Greg Remec
Senior Director
+1-312-606-2339
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com