CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed at 'BBB-' the rating on Alta Wind 2010 Pass-Through Trust's (Alta) $579.9 million ($441.4 million outstanding) senior secured pass-through certificates due 2035 (certificates). The Rating Outlook is Stable.
The affirmation reflects Alta's resilient financial performance under extreme wind conditions that have depressed energy output below P99 production estimates. Debt service coverage ratios (DSCRs) should return to the 1.55x - 1.65x range if wind conditions normalize to historical levels, and the project could also benefit from a more advantageous cost profile following the renegotiation of key operating agreements.
The project's 2015 DSCR of 1.23x is attributable to severe wind shortfalls, which were partially mitigated by high availability and low O&M costs compared to the original financial projections. Alta's revenues are anchored by a fixed-price purchase power agreement (PPA) with a strong investment-grade counterparty. The project's debt structure is standard for the asset class with the exception of a heavily back-ended amortization profile. An incremental reserve mechanism should provide sufficient additional liquidity to offset the increased debt service burden as the debt approaches maturity.
KEY RATING DRIVERS
Revenue Risk: Stronger
Fixed-Price Contracts: Alta's revenues are derived from a fixed-price PPA with Southern California Edison (rated 'A-'/ Stable Outlook), effectively mitigating price risks. State renewable portfolio standards should incentivize SCE to support the PPA, which includes achievable performance requirements. Fitch has revised its assessment to Stronger from Midrange primarily based on Alta's exposure to curtailment risk, which has moderated following an intensive build-out of the transmission grid earlier in the project's life.
Revenue Risk: Volume: Midrange
Volatile Wind Resource: Net output could fall below projections due to variability of the wind resource at a non-diversified, single-site project. Historically, wind conditions have fallen well below original P50 estimates. Fitch's financial analysis takes into account the potential for low wind conditions to negatively affect output.
Operation Risk: Midrange
Established Operating Profile: Alta's operating profile benefits from commercially proven technology and continued support from the turbine manufacturer under a maintenance agreement. Alta has also established a track record of high turbine availability and a consistent operating cost profile. The Alta projects will depend upon the ongoing maintenance of the turbines and balance-of-plant (BoP) to support projected availability.
Debt Structure: Midrange
Standard Lender Protections: Alta's lenders benefit from a covenant package with terms and conditions typical of similar project finance transactions. Fitch views the incremental reserve funding mechanism, which should effectively increase the debt rent reserve to 12 months, as a positive structural mitigant.
Investment-grade Financial Performance: In a Fitch rating case that combines lower energy output and availability with higher operations and maintenance (O&M) costs, DSCRs generally remain above 1.4x but fall near the 1.2x level between 2032 and 2034. The reduction in DSCRs occurs due to the back-ended amortization structure, as approximately 35% of amortization is compressed into the final five years of the tenor. The funding of the incremental reserve mechanism should offset the financial impact of higher scheduled debt service as the pass-through certificates approach maturity.
Peer Comparison: Alta's financial performance has fallen between the base and rating cases and is similar to that of other 'BBB-' rated wind projects. Comparable investment-grade wind projects, such as Caithness Shepherds Flat, LLC (rated 'BBB-'/Stable Outlook) and Continental Wind, LLC (rated 'BBB-'/ Stable Outlook) demonstrate minimum DSCRs of 1.3x under Fitch rating case conditions that include P90 wind output with other operational stressors that reduce availability and increase O&M costs.
RATING SENSITIVITIES
Negative - Persistent Output Shortfalls: Fitch may revise Alta's financial projections if energy output consistently underperforms the original Fitch base case forecast such that DSCRs fall below 1.3x.
Negative - Weak Availability: Credit quality could be weaker following a sharp reduction or downward trend in either turbine or BoP availability, particularly if Vestas-American Wind Technology (Vestas) is unable fulfill its contractual obligations.
Negative - Failure to Build Liquidity: If mandated additional reserve funding does not occur as the debt approaches maturity, operating cash flow may be insufficient to support the rating.
Positive - Upward Potential Limited: It is unlikely that Alta's rating would be upgraded due to the demonstrated volatility of the wind resource and the back-ended amortization profile.
CREDIT UPDATE
Alta's recent financial performance falls below original projections but remains consistent with the current rating. The Fitch-estimated 2015 DSCR of 1.23x is attributable to historic wind resource shortfalls, though the resulting reduction in revenues was partially mitigated by strong technical performance and low O&M costs. Alta has maintained a high level of turbine availability (98.5% or greater) for three consecutive years. Alta's cost profile has also declined since 2014, in large part due to a reduction in O&M fees and asset management fees. Historically, O&M costs have fallen approximately 20% below original projections, primarily due to lower than anticipated property taxes and insurance costs.
Wind performance has consistently fallen well below P50 levels over the past five years. The wind resource performed especially poorly in 2015, falling to 10% below P99 levels. Fitch has observed other temporary wind resource declines of similar magnitude and duration, particularly in the western United States, due to an apparent dislocation of historical weather patterns. Alta's experience suggests that the original projections may have overstated base case energy output, which has remained within the bounds of P99 estimates with the notable exception of 2015.
Revenues declined to a record low in 2015 on extraordinarily weak wind performance, and Alta calculated a lease rent coverage ratio of 0.99x for 2015. The sponsor, NRG Yield Inc., provided a $5.28 million cash contribution to meet Alta's lease payments. The additional liquidity was necessary only to meet the equity portion of rent; a failure to pay equity rent would not trigger an event of default for the pass-through trust certificates under the financing documents. Alta's equity rent reserve letter of credit would have been sufficient to meet the cash shortfall but remains undrawn.
Fitch views 2015 financial performance as a successful test of Alta's debt structure that demonstrates the strength of the project. Alta's DSCRs had ranged between 1.55x and 1.60x over the prior two years, and Fitch believes that the project remains capable of achieving these metrics if wind conditions return to historical levels. Alta has shown indications of a recovery with Q1 2016 revenues and energy output reaching a five-year high. Fitch understands that early Q2 2016 performance was considerably weaker than in Q1 2016, however, underscoring the volatility inherent to the wind resource.
Going forward, Alta should benefit from a more advantageous cost profile following the renegotiation of key operating agreements. Alta previously achieved a considerable reduction in subordinated fees under the existing O&M and asset management services agreements with Terra-Gen Operating Company. Fitch understands that Alta intends to shift operational responsibility to affiliates of NRG Yield, a qualified operator with extensive experience in the wind power sector.
Alta and Vestas replaced the turbine service and maintenance agreement (SMA) with a long-term SMA expiring in January 2031. The SMA, which provides a comprehensive scope of services that covers both scheduled and unscheduled turbine maintenance, includes reduced pricing terms that could improve DSCRs by more than 0.05x. The SMA should minimize the risk of long-term underperformance and provide ample financial incentive to Vestas, which has reliably operated and maintained the turbines over the past five years.
Alta consists of special purpose companies created solely to develop, own, and operate the 570 MW wind farm located in the Tehachapi Pass near the town of Mojave in southwestern California. Alta sells energy output to Southern California Edison under a fixed-price PPA expiring Dec. 31, 2035. Alta used the proceeds of the certificates to fund the project's construction and reimburse the original sponsor's development costs.
SECURITY
The certificates are secured by the owner-lessors' repayment obligations under the lessor notes, which in turn are secured by a first-priority security interest in the project's assets. The lessor notes issued by each owner lessor are secured by the collateral owned by that owner-lessor; the lessor notes are not cross-collateralized across all four projects. Because the flow of funds is structured to ensure that aggregate cash flow is available to each of the four lessees, Fitch believes the lack of cross-collateralization does not affect Alta's probability of default.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967
Rating Criteria for Wind Projects (pub. 31 Mar 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878936
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004979
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