Fitch Affirms Shepherds Flat Senior Secured Trust Debt
NEW YORK -- October 12, 2012
Fitch Ratings affirms the following ratings on a total of $1.2 billion
pari-passu project debt loaned to Caithness Shepherds Flat, LLC (CSF or the
Shepherds Flat Funding Trust I:
--$420 million Series A-1-G senior secured fixed-rate trust certificates at
'AAA'; Outlook Negative.
--$105 million Series A-1-a senior secured fixed-rate trust certificates at
'BBB-'; Outlook Stable.
Shepherds Flat Funding Trust II:
--$540 million A-2-G senior secured floating rate loan at 'AAA'; Outlook
--$135 million A-2-a senior secured floating rate loan at
'BBB-'; Outlook Stable.
KEY RATING DRIVERS
DOE Guarantee for 80% of Project Debt: The 'AAA' rating on the A-1-G
certificates and A-2-G loans reflects the certainty of timely debt service
payments due to the U.S. Department of Energy (DOE) loan guarantee for 100% of
principal and interest on the guaranteed debt.
Fully Contracted Revenues: The Project has three fixed-price power purchase
agreements (PPAs) with high investment grade utility, Southern California
Edison (rated 'A-' with a Stable Outlook), that effectively mitigate price and
volume risk for 100% of the Project's output through debt maturity.
Construction Substantially Complete: Construction is on time and on budget,
and the Project began the Operating Period under all the PPAs by March 2012.
Start-up issues are expected to be covered by warranties. Turbine
manufacturer, GE, provides warranties for the power curve and serial defects.
Variable Wind Resource: The wind resource projections and net energy output
are largely untested at this greenfield project, and could fall below expected
forecasts. Favorably, wind projections are based on an unusually extensive
data set that includes six years of on-site wind data helping to reduce
Investment Grade Debt Coverage: The profile of debt service coverage ratios
(DSCR) in Fitch's rating case reflects an average of 1.42 times (x),
consistent with investment grade. The minimum 1.33x DSCR indicates the Project
has some cushion to withstand lower wind levels in most years.
WHAT COULD TRIGGER A RATING ACTION
--Energy output or wind resource performs persistently below P90 projections;
--New GE turbine model does not perform as expected;
--Operating expenses consistently above rating case expectations;
--Downgrade of the U.S. sovereign rating supporting the guaranteed debt.
The rated debt is secured by a first-priority lien on all CSF assets,
revenues, contracts, accounts, and equity ownership.
As of this annual review date, construction on CSF was substantially complete
for the full 845 megawatt (MW) nameplate capacity. All 338 turbines have been
erected and commissioned, the three PPAs were effective as of March 2012, and
the balance of plant (BOP) contract has reached Substantial Completion.
Project costs were 96% completed and paid by the end of Sept. 2012, with 4% of
the construction budget remaining primarily due to timing issues.
Overall turbine availability during construction has been between 96% and 97%,
which Fitch views as strong performance. Due to lower wind speeds, however,
pre-completion energy output was lower than expected. Cumulative
pre-completion production through Sept 2012 reflects a 15% reduction from
typical P50 forecasts.
Caithness also disclosed that completion milestones under two of CSF's three
Turbine Supply Agreements (TSAs) with GE are still pending, which is fairly
unusual for an operating project. The TSAs remain active due to a single
turbine foundation fire that occurred on Sept. 10, 2012 in the South Hurlburt
section of the Project. CSF has retained $37 million in milestone payments
under the TSAs until final completion under these agreements is reached. Fitch
expects that any financial impact that results from the incident will be
mitigated either by warranty or by insurance at minimal additional cost to the
CSF also experienced a transformer breaker failure in early Oct. that Fitch
views as a typical start-up issue. The breaker failure reduced output by 40%
in the Horseshoe Bend section of CSF. The cause of the breaker failure is
still under investigation, but is expected to be a warranty event. CSF
experienced only temporarily reduced output, under two-weeks in duration, as a
result of the issue and the section is now back to full output capacity.
Shepherds Flat Funding Trust I (SFFT-I) and Shepherds Flat Funding Trust II
(SFFT-II) are bankruptcy remote trusts, non-recourse to the owners. Together,
the trusts issued $1.2 billion total debt which is 80% guaranteed by the DOE.
The proceeds of SFFT-I and SSFT-II's debt issues were loaned to CSF to fund a
portion of the total $1.9 billion project costs. SFFT-I and SSFT-II reached
financial close in December 2010.
CSF is an 845-megawatt wind-powered electric generation project located along
the Columbia River Gorge in Gilliam and Morrow Counties, Oregon. CSF was
developed by Caithness, and is owned jointly by Caithness, GE Energy Financial
Services, Google Inc., Sumitomo Corporation of America, and Tyr Energy.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance'
(July 11, 2012);
--'Rating Criteria for Onshore Wind Farms Projects'
(April 16, 2012);
--'Caithness Shepherds Flat, LLC' New Issue Report
(June 1, 2011).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Onshore Wind Farm Projects
Caithness Shepherds Flat, LLC
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Cynthia Howells, +1 212-908-0685
One State Street Plaza
New York, NY 10004
Andrew Joynt, +1 212-908-0842
Greg Remec, +1 312-606-2339
Elizabeth Fogerty, +1 212-908-0526
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