Fitch Ratings has downgraded the ratings on FPL Energy National Wind, LLC’s (Opco) $365 million senior secured indebtedness due 2024 to ‘BB’ from ‘BB+’ and FPL Energy National Wind Portfolio, LLC’s (Holdco) $100 million senior secured indebtedness due 2019 to ‘B-‘ from ‘B’. The downgrades are due to continuing increases to expenses combined with lower than anticipated wind production, leading to reduced financial cushion compared to earlier projections. The Rating Outlook has been revised to Negative from Stable to reflect the uncertainty regarding the current operating expense profile and ability to maintain projected availability levels.
KEY RATING DRIVERS
–Revenue Shortfalls: Revenues are derived under long-term contracts for a portfolio of wind projects and are expected to remain consistent with historical results. These results have been significantly lower than original projections, primarily due to lower than projected wind resources at roughly 6% below original P50 wind. Favorably, lower wind resources have been partially mitigated by high availability levels.
–Increased Costs: Operating and maintenance (O&M) expenses have persisted well above expectations with an average increase over the original base case of 46% through 2012. Expenses are expected to remain near current levels, with an increase of 6% above prior year budget for 2013. Marginal increases to O&M have a significant impact on debt service coverage ratios (DSCRs) due to the decreased cash flow cushion from revenues.
–Limited Financial Cushion: Financial performance in recent years has been lower than projected, and will be subject to further pressure subsequent to expiration of the production tax credits (PTC) in 2013. Lower than historical wind conditions, reduced availability or increases to O&M in any year may require a draw on reserves, particularly for the Holdco debt. In the Fitch base case, Opco cash flow is near the threshold of 1.25x for annual distributions. If cash flows fall short of this level, Holdco will rely solely on cash on hand and the one-year debt service reserve (DSR).
WHAT COULD TRIGGER A RATING ACTION
–Change in Operating Expenses: Continued increases to the current O&M budget could further erode cash flow and negatively impact the rating. Cost containment could stabilize the rating at the current level.
–Reduced Availability: A persistent reduction in portfolio availability from historical levels may result in further downgrades.
The project debt at the Opco is secured by all tangible and intangible assets, including real and personal property, a security interest in all bank accounts, insurance policies, and project contracts. The project debt at the Holdco is secured by a first priority pledge of ownership interests and a first priority security interest in the Holdco accounts and contract rights. Distributions from the Opco are the Holdco’s sole source of revenues.
Operationally, availability has remained stable overall at 95% across the portfolio through 2012. Wind production has remained consistent, albeit at a level less than P50 but greater than P90. Fitch projected DSCRs are vulnerable to reduced wind resources and lower availability with escalating expenses for aging assets, indicative of coverage levels more consistent with lower ratings. 2012 DSCR is estimated at 1.35x at the Opco and 1.17x at the Holdco, a decrease from the budget, reflecting reduced availability at the Oklahoma and Sooner projects and increased O&M due to higher gearbox failure rates. Average project availability has returned to historical levels while O&M stresses are captured in the Fitch rating case. Budget 2013 DSCR has been revised downwards to below 1.30x for the Opco and near breakeven for the Holdco compared to above 1.40x for each tranche as budgeted in the prior year.
Currently, the Holdco benefits from a one-year DSR plus additional cash on hand due to managed distributions by the Sponsor that has ensured debt repayment through March2013. Current projections indicate that the projects should have sufficient cushion to cover the Septepmber 2013 payment as well. If all cash flow ceases to reach the Holdco level, Fitch expects there will be sufficient cash to cover a year and a half of debt service through the September 2014 payment. Two consecutive years of sub 1.25x coverage at the Opco would trap cash and run down the cash balances at the Holdco. Under Fitch’s rating case which incorporates low wind conditions as well as availability reductions and O&M increases in the later years, the Holdco shows below 1.0x coverage following a cash lock up in 2014 due to sub 1.25x coverage at the Opco and a subsequent rundown of available liquidity at the Holdco. Future results consistent with the rating case projections are likely to lead to negative rating action. Favorably, historical coverage has been relatively stable at above 1.30x despite wind resource and operating expense challenges and debt service payments have been sculpted to decrease following the expiration of PTCs in 2013.
The Opco is a portfolio of nine operating wind farms with an aggregate capacity of approximately 533.5 MW. 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 power purchase agreements 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 Energy Capital Holdings, Inc. ‘NextEra’ (rated ‘A-‘/Stable Outlook by Fitch).
Applicable Criteria and Related Research:
–‘Rating Criteria for Infrastructure and Project Finance’ (July 12, 2012);
–‘Rating Criteria for Onshore Wind Farm Projects’ (April 16, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Onshore Wind Farm Projects