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 September 11, 2015 - 2:46 PM EDT
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Fitch Affirms Continental Wind, LLC's Notes at 'BBB-'; Outlook Stable

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 revenue risk.

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 estimates.

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.

Peer Comparison

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.

RATING SENSITIVITIES

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.

CREDIT UPDATE

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 manufacturers

SECURITY

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 years.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)

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

Rating Criteria for Onshore Wind Farm Projects (pub. 14 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865785

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990712

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990712

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE 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 WEBSITE.

Fitch Ratings
Primary Analyst
Christopher Joassin
Director
+1-312-368-3166
Fitch Ratings
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Yvette Dennis
Senior Director
+1-212-908-0668
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com


Source: Business Wire (September 11, 2015 - 2:46 PM EDT)

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