Fitch Ratings has affirmed the 'BBB-' rating for Continental Wind LLC's
(CW) $613 million ($572 million outstanding) senior secured notes due
2033. The Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmation reflects CW's expected financial performance, which
remains consistent with Fitch's original base case projections.
Quarterly debt service coverage ratios (DSCRs) have averaged more than
1.70x over the past 18 months. The project has maintained a stable
operational profile with strong availability factors and level operating
and maintenance (O&M) expenses. Better-than-expected production at the
Michigan Wind II project has bolstered cash flow even though
portfolio-wide energy output has fallen slightly below P50 levels. The
project rating is anchored by various long term power purchase
agreements (PPAs), limited merchant exposure, an experienced operator,
and a robust wind resource across a diversified portfolio.
Largely Contracted Revenues - Revenue Risk- Price: Midrange
The projects have entered into fixed-price, 20- to 25-year 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 is 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) are sold to Exelon Corporation (rated 'BBB+' with a
Negative Watch by Fitch) at published PTC prices, introducing additional
Diverse Wind Resource - Revenue Risk- Volume: Midrange
The original energy production assessments were generally completed with
an amount and quality of data consistent with industry standards. Fitch
believes that the diversity of 13 project sites with multiple wind
regimes helps to mitigate collective wind resource volatility.
Favorably, production forecasts were prepared using post-completion
data, which Fitch considers relatively more reliable.
Manageable Operating Risk - Operating Risk: Midrange
The wind turbine technologies employed by the CW projects are generally
considered proven. However, some of the turbine models have experienced
component issues in their respective fleets, which the IE considered
typical and correctable. Further, component issues are covered under
warranty and generally considered in production loss factors and cost
Conventional Debt Structure - Debt Structure: Midrange
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 have been funded with letters of
credit that are pari passu to the senior secured notes.
Investment-Grade Financial Profile
Fitch views financial performance in the Fitch rating case as consistent
with an investment-grade rating based on a minimum debt service coverage
ratio (DSCR) level in excess of 1.30x under Fitch's rating criteria for
onshore wind projects. The Fitch rating case combines lower energy
output and availability with a higher cost profile resulting in average
and minimum DSCRs of 1.38x and 1.33x, respectively.
Average DSCRs under Fitch's rating case scenario are in line with
comparably rated wind farms. Caithness Shepherds Flat (rated 'BBB-' with
a Stable Outlook) has an average DSCR of 1.42x 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.
Negative - Production Shortfalls: Persistently lower than estimated
energy production and lower revenues may lead to a downgrade.
Negative - Operational Challenges: Decreased project availability or an
inability to effectively manage O&M costs and DIR charges that result in
DSCRs below 1.30x may negatively affect the rating.
Positive - Improved Rating Case: Continued strong financial performance
could moderate rating case stresses and result in a financial profile
consistent with a higher rating.
CW's financial performance is generally consistent with Fitch's base
case projections, and DSCRs have ranged between 1.65x and 1.75x.
Revenues have been supported by strong technical performance, and CW's
portfolio-wide availability has consistently exceeded 98% with low
forced outage rates. The project has not identified any serial defects
or any other persistent technical issues not already addressed by the
turbine manufacturers. CW has reported only minor failures in
balance-of-plant equipment thus far in 2015, and Fitch views the impact
of these outages as minimal.
Better-than-expected production at the Michigan Wind II project has
supported cash flow even though portfolio-wide energy output has fallen
below P50 levels due to wind resource shortfalls. Total energy output
dropped only 0.6% below P50 levels in 2014, but energy output in the
first half of 2015 lagged P50 levels by 7.2%. The project's recent
production is well within the tolerances for investment grade and the
portfolio effect has worked to support base case levels of financial
performance. Curtailment, which previously had a material impact on
delivered energy volumes, fell to less than 1% of total output following
the completion of transmission upgrades in the MISO region.
The project achieved an estimated DSCR of 1.71x for 2014, which compares
favorably to the originally projected base case DSCR of 1.67x. The
financial results were driven by near-P50 energy production, higher
output at the Michigan Wind II project, and stable O&M costs that were
held in-line with projections. Revenues have trended downward in 2015,
consistent with lower energy output and weaker wind conditions, while
O&M expenses remain flat. Fitch estimates that the 2015 DSCR should
remain above 1.50x even if current wind conditions persist through the
remainder of the calendar year. Fitch's rating case, which incorporates
a combination of P90 energy output and increased costs, averages 1.38x
with a minimum of 1.33x.
Continental Wind 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 were placed in commercial operation
between May 2008 and December 2012 using eight turbine models from five
The collateral consists of a 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, must be used to
redeem a portion of the notes.
In addition, Exelon Corporation has entered into a tax equity put option
exercisable by lenders upon acceleration and equity foreclosure of CW.
The put expires upon the earlier of 2023 or the expiry of PTCs, and
requires that the off-taker pay the net present value of 99% of any PTCs
earned and 5% of distributable cash flows 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
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)
Dodd-Frank Rating Information Disclosure Form
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
View source version on businesswire.com: http://www.businesswire.com/news/home/20150911005800/en/
Copyright Business Wire 2015