Fitch Downgrades FPL Energy National Wind Opco to 'BB' & Holdco to 'B-';
Outlook Revised to Negative
NEW YORK -- December 20, 2012
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).
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 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
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Nicole Farucci, +1-212-908-0684
One State Street Plaza
New York, NY 10004
Yvette Dennis, +1-212-908-0668
Gregory Remec, +1-312-606-2339
Elizabeth Fogerty, +1-212-908-0526 (New York)
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