CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating for Alta Wind 2010 Pass-Through Trust's (Alta) $579.9 million ($461.1 million outstanding) senior secured pass-through certificates due 2035 (certificates). The Rating Outlook is Stable.
The rating affirmation reflects relatively strong historical debt service coverage ratios (DSCRs) in the 1.55x to 1.65x range. The lower than expected wind resource performance has been partially mitigated by high availability and a favorable expense profile compared to the original financial projections. The rating is anchored by a fixed price purchase power agreement (PPA) with a strong investment grade counterparty in addition to superior technical performance. Alta's debt structure is standard for the asset class with the exception of a heavily back-ended amortization profile, though an incremental reserve mechanism should provide sufficient additional liquidity to offset the increased debt service burden.
KEY RATING DRIVERS
Fixed Price Contracts (Revenue Risk: Price: Midrange): Alta's revenues are derived from a fixed-price PPA with Southern California Edison (rated 'A-' with a Stable Outlook by Fitch), effectively mitigating price risks. State renewable portfolio standards should incentivize SCE to support the PPA, which includes achievable performance requirements.
Wind Supply Risk (Revenue Risk: Volume: Midrange): 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 below P50 estimates. Fitch's financial analysis takes into account the potential for low wind conditions to negatively affect output.
Established Operating Profile (Operation Risk: Midrange): Alta's operating profile benefits from commercially proven technology, a strong turbine warranty, 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.
Standard Lender Protections (Debt Structure: Midrange): 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: Similar to comparably rated peers, Alta's performance has fallen between the base and rating cases. High availability, lower expenses and reduced curtailment have partially offset lower wind speeds to support a 1.57x DSCR in 2014. Comparable investment-grade wind projects generally demonstrate a range of DSCRs between 1.3x and 1.70x.
Persistent output shortfalls (Negative): 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.
Weak availability (Negative): Credit quality could be weaker following a sharp reduction or downward trend in either turbine or BoP availability, particularly if Vestas is unable fulfill its warranty obligations.
Failure to build liquidity (Negative): If mandated additional reserve funding does not occur as the debt approaches maturity, operating cash flow may be insufficient to support the rating.
Alta's recent financial performance has generally matched the original base case DSCR forecast of 1.6x and remains consistent with investment-grade metrics for the rating category. Fitch estimates that Alta achieved a DSCR of 1.57x in 2014 driven by weaker than expected wind conditions with partial mitigation from strong technical performance and low operating costs. Alta has maintained a high level of turbine availability at 98.5% in 2014 and 98.6% in Q1 2015. Alta's operating cost profile has remained steady over the past two years, with the project achieving O&M costs 20% below original projections primarily due to lower property taxes and insurance costs.
Wind performance has consistently fallen below P50 levels by an average of nearly 5% over the past four years. The wind resource was especially weak in Q1 2015 with Alta experiencing P99 wind conditions. Fitch has observed other temporary wind resource declines of similar magnitude and duration followed by improvement to P50 levels, though the timing of any given recovery is uncertain. Historical experience suggests that the original projections may have overstated base case energy output. However, Fitch would not revise the P90 forecast absent a new wind resource analysis, consistent with Fitch's updated criteria.
Fitch estimates that Alta's 2015 DSCR may fall below 1.4x because of the first quarter's weak wind performance, which reduced cash flow by approximately 50% versus the same period in prior years. Fitch's projection relies on the assumption of P50 conditions for the remainder of 2015, and any further shortfalls could drive the 2015 DSCR closer to 1.3x. While there is currently no indication that the reduction in wind speeds will persist, the temporary reduction in financial cushion may exacerbate the impact of other unexpected stressors in the short term.
Longer term, DSCRs generally remain above 1.4x under the Fitch rating case with the exception of a three-year period between 2032 and 2034, when rating case coverage falls to about 1.2x. The incremental 12-month debt reserve is expected to mitigate potentially lower coverage and provide financial cushion consistent with the investment grade rating.
NRG Yield Inc. (NRG Yield) closed its acquisition of the Alta projects from Terra-Gen Power LLC (Terra-Gen) on Aug. 12, 2014. Fitch views the acquisition as a credit neutral event. The NRG Yield management team has extensive experience with the asset class, and operations remain under the stewardship of the contractual O&M providers, Vestas and Terra-Gen Operating Company (TGOC). Fitch has confirmed that the post-acquisition project debt structure and bankruptcy-remote status of the Alta special purpose vehicle have not changed.
Fitch expects that NRG Yield will maintain existing operational relationships in the short-term, though it remains unclear whether NRG Yield will retain the existing contractors over the long run. Fitch believes that any strategy pursued by the sponsor will include qualified operating personnel and a comprehensive O&M plan. NRG Yield indicated that it is negotiating an extension to the Vestas turbine maintenance agreement and certain changes to the terms of the TGOC O&M agreement, which was extended to August 2017 in conjunction with the acquisition. NRG Yield is currently transitioning managerial control internally from TGOC, which has continued to perform asset management functions. Fitch will fully assess the operating cost impact of the third party O&M agreements once they are finalized.
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.
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
Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)
Rating Criteria for Onshore Wind Farm Projects (pub. 14 May 2015)