NEW YORK--(BUSINESS WIRE)--Fitch Ratings has as affirmed the ratings on FPL Energy National Wind, LLC's (Opco) and FPL Energy National Wind Portfolio, LLC's (Holdco) senior secured notes as follows:
--Opco $365 million ($52.406 million outstanding) senior secured indebtedness due 2024 at 'BB';
--Holdco $100 million ($2.54 million outstanding) senior secured indebtedness due 2019 at 'B-'.
The Rating Outlook is revised to Stable from Negative for both tranches of debt.
The ratings are supported by a diverse wind regime generating revenues under fixed-price long-term power purchase agreements (PPA), but historical wind volatility and increased operating costs have reduced cash flows below initial estimates. Rating case financial performance reflects a near-term downturn that is below the current 'BB' rating for the Opco, while the long-term profile suggests potentially improved credit quality. The Holdco's rating case reliance on reserves to support debt repayment through 2018 provides a limited margin of safety consistent with the 'B-' rating. The Stable Outlooks reflect the project's completion of structural repairs at one of its wind farms, and improved portfolio operating and financial performance, which Fitch expects can be maintained going forward.
KEY RATING DRIVERS
Fully Contracted Revenues - Revenue Risk- Price: Midrange
Revenues are derived under fixed-price long-term contracts for a portfolio of eight wind farm projects totalling 389.6 megawatts (MW). The credit quality of the offtakers, which are investment grade, does not actively constrain the current ratings.
Revised Production Estimates - Revenue Risk- Volume: Weaker
Actual wind resource performance has fallen persistently below the original estimates. The project benefits from geographic diversification but any portfolio effect has not fully mitigated generation losses from reduced wind speeds overall. Revised projections exclude one divested portfolio project and utilize an updated P50 forecast based on actual performance, which is on average 10% below the original P50.
Stabilizing Operating Profile - Operating Risk: Midrange
Operating and maintenance (O&M) expenses have persisted well above the original base case. Fitch's projections utilize the increased actual historical O&M cost in the base case with additional stress applied in the rating case for the later years. The project has historically maintained good availability with an average of about 94% portfolio-wide since 2005.
Debt Structure - Debt Structure: Midrange (Opco)/Weaker (Holdco)
The Opco and Holdco debt benefit from 12-month debt service reserves (DSR) with additional reserves for operations and major maintenance. The distribution trigger at Opco of 1.25x for the past 12 months and projected six months at 1.10x helps to ensure timely debt payment at Opco. Under a cash trap scenario, however, the Holdco debt is fully reliant on limited cash reserves.
Limited Financial Cushion
Financial performance has been lower than original projections due to reduced energy revenues and higher operating costs. Fitch's rating case includes a 9%-12% reduction to output and a 10% increase to O&M expenses. The Opco rating case average debt service coverage ratio (DSCR) is 1.37x with a minimum of about 1.15x in 2017 and 2018. Under the rating case, Holdco cash and debt service reserves are adequate to support debt payment through 2018, just short of the March 2019 maturity.
Opco and Holdco ratings are lower than publicly rated peers. Fitch rated wind projects that meet the rating case investment grade DSCR threshold of 1.30x include Continental Wind ('BBB-'/ Stable Outlook) with an average DSCR of 1.38x and a minimum of 1.33x, and Caithness Shepherds Flat ('BBB-'/Stable Outlook) with an average DSCR of 1.41x and a minimum of 1.31x.
Negative: Material decline in generation output and Opco DSCR below 1.20x.
Positive: Positive rating action is unlikely prior to full and timely payment of the Holdco debt, given challenges in past performance.
SUMMARY OF CREDIT
Operating performance has rebounded in the second half of 2016, as management reports foundation repairs at one of the wind farms were completed resulting in strong third quarter (Q3) plant availability consistent with historical levels. Overall portfolio availability averaged 94% in Q3, consistent with historical levels. Portfolio electricity production for the year has been about 80% of budget due to the combination of plant availability and wind resource conditions.
As a result of the improved operating performance, the six-month DSCR ending September 2016 was just above 1.40x, exceeding Fitch's expectations. Though the February 2016 DSCR was less than 1.0x, the debt payment was made with support from the debt service reserve, which management reports has since been replenished. Use of the reserve was driven by the timing of repairs and now that they are complete, Fitch would not expect a similar strain on cash flow unless the wind resources severely underperform.
Base and Rating Cases
Under the assumption that Opco financial and operational performance rebounds, base case DSCRs are more than 1.70x. In this scenario, the Opco meets the forward and backward equity distribution test, allowing it to release cash to support Holdco obligations.
In Fitch's rating case of 10% higher expenses and about 10% lower generation output, the project's average DSCR is 1.34x through debt maturity in 2024 for the Opco, which is in line with average historical performance prior to the 2015 operating challenges. DSCRs in the rating case are stressed in 2017 and 2018 to an average of 1.15x. In this scenario, cash is trapped at the Opco and unavailable for Holdco debt repayment, which will rely on available reserve funds. Fitch projects that after this temporary decline through 2018, the Opco annual DSCRs should return to 1.22x or greater. If the Opco doesn't meet the distribution test in early February 2017, Holdco repayment will rely on meeting the test in September 2017 or February 2018 to support the last Holdco debt payment in February 2019.
The Opco and Holdco maintain solid liquidity to mitigate unforeseen events. The Opco has cash reserves of $2.6 million in the revenue account, which is roughly equal to half of the February 2017 debt payment. The Opco also has $2.5 million for major maintenance. There is an O&M reserve of $15 million and a letter of credit (LC) backing the 12-month DSR for Opco. The Holdco has a 12-month DSR, which along with the LC and O&M reserve, is guaranteed by the sponsor NextEra Energy Capital Holdings, Inc. (NextEra; 'A-', Stable Outlook). Any draws on the reserves must be replenished through the project's cash flow but there are no required interest payments or established timeframes for replenishment.
The Opco is a portfolio of eight operating wind farms with an aggregate capacity of approximately 389.6 MW (previously 533.5 MW including the 144 MW Wyoming project). Each project company is wholly owned by the Opco and is otherwise unencumbered with project-level indebtedness. All of the output of each wind farm is committed under long term PPAs with counterparties that are unaffiliated with the Opco.
Under the agreements, the Opco generally receives a fixed-energy price for all energy produced by the wind farm, and the counterparty generally pays all costs associated with transmission and scheduling. Distributions from the Opco are the Holdco's sole source of revenues. The HoldCo is an indirect, wholly owned subsidiary of NextEra.
Additional information is available on www.fitchratings.com
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
Rating Criteria for Wind Projects (pub. 31 Mar 2016)
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