Fitch Affirms FPL Energy National Wind Opco at 'BB' & Holdco at 'B-'; Opco
Outlook Remains Negative
NEW YORK -- December 11, 2013
Fitch Ratings has affirmed the ratings of FPL Energy National Wind, LLC (Opco)
and FPL Energy National Wind Portfolio, LLC (Holdco) as follows:
--Opco $365 million senior secured notes due 2024 at 'BB';
--Holdco $100 million senior secured notes due 2019 at 'B-'.
The rating actions follow the executed sale of the portfolio's Wyoming wind
farm and subsequent buy down of debt, subject to closing.
The Rating Outlook for the Opco notes remains Negative due to the potential
for continued pressure on cash flow from assets that have historically
produced electric generation materially below forecast. The Rating Outlook for
the Holdco notes has been revised to Stable from Negative based on adequate
liquidity to support debt payment during the remaining six-year tenor.
KEY RATING DRIVERS
--Fully Contracted Revenues: Revenues are derived under fixed-price long-term
contracts for a portfolio of nine wind farm projects totaling 534 megawatts
(MW). Additional volumes through 2028 for the Vansycle wind farm due to an
automatic extension of the power purchase agreement (PPA) were not originally
contemplated and enhance the portfolio's revenue profile. Expiration of the
production tax credits (PTCs) in 2013 has no rating impact as these additional
revenues were originally projected to roll off in 2014. (Midrange)
--Lower Wind Production than Anticipated: Actual wind resource since inception
has been roughly 8% below the original P50 estimate though with below P90
performance in 2012-2013. The Project benefits from diversified asset sites;
however, the portfolio effect has not fully mitigated generation losses from
reduced wind speeds. Positively, the revised projections utilize a P50
forecast based on actual performance which is 6-7% below the original P50.
Fitch reduces this forecast further by 9-12% in the rating case to assess cash
flow stability during periods of reduced output. (Weaker)
--Increased Operating Costs Partially Mitigated by High Availability:
Operating and maintenance (O&M) expenses have persisted well above the
original base case but have been relatively stable over the past six years.
Fitch's projections utilize the historic increased O&M cost in the base case
with additional stress applied in the rating case for the later years.
Positively, the Project has historically maintained high availability with an
average of 95.6% portfolio-wide since 2005. (Midrange)
--Debt Structure Limits Financial Flexibility at Holdco: The Opco and Holdco
debt benefit from 12 month debt service reserves (DSR) with additional
reserves for operations and major maintenance. The distribution trigger at
Opco of 1.25x for the prior and projected 12 months or 1.10x for the prior and
projected six months helps to ensure timely debt payment at Opco. However,
under a cash trap scenario, the Holdco's structurally subordinated debt would
have a limited margin of safety as it would be fully reliant on the debt
service reserve to support debt repayment. (Midrange/Weaker)
Limited Financial Cushion: Financial performance has been lower than projected
due to lower revenues and higher expenses than originally projected.
Positively, the purchase of the Wyoming asset from the portfolio and related
debt buy down at both the Opco and Holdo level help to stabilize debt service
coverage ratios (DSCR) at the current rating level. Fitch's rating case
incorporates a reduction to output and a 10%-15% increase to O&M expenses and
yields an average DSCR of 1.21x with a minimum of 1.04x for the Opco and an
average of 1.00x and minimum of 0.92x for the Holdco. (Weaker)
WHAT COULD TRIGGER A RATING ACTION
--Failure to Finalize Wyoming Sale: Failure to close on the proposed sale of
the Wyoming project with the related debt buy down would result in a negative
--Change in Operating Expenses: A material change in O&M expenses above
Fitch's 10-15% stress could positively or negatively impact the rating level;
--Production Levels: Demonstrated portfolio performance net of the Wyoming
project that is significantly different from updated projections could revise
Fitch's view on credit quality.
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.
Fitch views positively the executed sale of the 144MW Wyoming Plant to
TransAlta for the sum of $102 million, subject to FERC approval and financial
close. Wyoming is the largest project within the portfolio and also provides
the largest portion of revenues to cover debt service, and the transaction
serves to substantially de-lever the project. The removal of Wyoming is
largely offset by the large reduction (56%) in debt outstanding. The proceeds
stemming from the purchase of the Wyoming plant from the portfolio will be
split 80/20 between the Opco and Holdco, or roughly an $80.4 million
allocation to buy down Opco debt and $20.1 million allocation to buy down the
Holdco debt after closing costs. The Holdco debt buydown will take effect
after the funds have passed through the waterfall with the first decreased
Holdco debt service amount in September 2014. The transaction will result in
improved coverage at both the Opco and Holdco level compared to prior rating
case projections and is expected to be executed before the end of 2013 with
the redemption of the bonds to follow after financial close.
Absent the close of this transaction and consistent with Fitch's previous
rating case, the Opco DSCR level is expected to dip below the distribution
trigger which would trap cash at the Opco level and could ultimately lead to a
Holdco default. The proposed transaction, however, mitigates further ratings
downgrade at this time. A return to a Stable Outlook for the Opco debt is
predicated on electric generation output consistent with the revised wind
resource forecast, as debt repayment is reliant on fewer and smaller assets in
the portfolio. Even if cash is trapped at the Opco level, Fitch believes that
with only six years remaining and a 12 month debt service reserve, the Holdco
will be able to meet debt obligations supportive of the Stable Outlook.
In order to manage tight debt service coverage levels, the sponsor has been
managing distributions released from the Opco and reducing the sponsor's own
distribution to support the Holdco debt including in 2013. Fitch calculated
DSCR for the 2013 calendar year (based on nine months of operating data and
three months of projected data compared to the March and September debt
service payments) resulting in an Opco DSCR of 1.25x with Holdco coverage of
0.97x compared to 1.28x and 0.98x respectively for 2012. There was no
distribution made following the September 2013 payment and the sponsor has
managed the cash flow to the Holdco in order to ensure there is sufficient
coverage for the 2013 payments.
Operationally, availability has remained relatively stable and strong overall
at 94% across the portfolio through Q2 2013 with the majority of downtime
stemming from component replacements at the various sites. Annual wind
production at the projects has continued to come in at less than P50. However
due to low wind in the last two years, average production is now at one-year
P90 level through 2013. Fitch notes that the below P90 production through Q2
2013 level is partially due to lower capacity factors stemming from
curtailment events at the different project sites. The curtailments were
related to off-taker or transmission events such as emergency outages for line
maintenance. Fitch notes that any market based curtailment is reimbursed under
the PPA. The impact of these curtailments was minimal compared to actual
output reductions due to lower wind production and availability.
O&M has historically exceeded pro forma assumptions and is expected to
continue due to an increase in labor demand and component costs. Fitch's
rating accounts for a 10-15% stress in operating costs to account for any
increases in O&M over the long term.
The Opco is a portfolio of nine operating wind farms with an aggregate
capacity of approximately 533.5 MW which includes the Wyoming project that is
to be sold. 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
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);
--'Rating Criteria for Onshore Wind Farm Projects' (April 11, 2013).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Onshore Wind Farm Projects
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Nicole Czarny, +1-212-908-0684
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Yvette Dennis, +1-212-908-0668
Gregory Remec, +1-312-606-2339
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