Fitch Affirms Shepherds Flat Senior Secured Trust Debt
Shepherds Flat Funding Trust I:
--\\$420 million series A-1-G senior secured fixed-rate trust certificates at 'AAA'; (\\$420 million outstanding);
--\\$105 million series A-1-a senior secured fixed-rate trust certificates at 'BBB-'; (\\$105 million outstanding).
Shepherds Flat Funding Trust II:
--\\$540 million A-2-G senior secured floating rate loan at 'AAA'; (\\$407.439 million outstanding).
--\\$135 million A-2-a senior secured floating rate loan at 'BBB-'; (\\$101.859 million outstanding).
The Rating Outlook for all debt tranches is Stable based on signs of improving near-term financial performance.
KEY RATING DRIVERS
The affirmation of the 'BBB-' rating on the non-guaranteed project debt is based on the project's adequate financial performance with debt service coverage ratios (DSCR) averaging 1.53x from 2012 to 2014. Performance for 2015 has thus far suffered from low wind resource, but Fitch expects long-term results to be in line with the current rating. Long-term contracts with a highly rated offtaker, Southern California Edison (SCE; 'A-' with a Stable Outlook) and a strong operator, General Electric (GE), anchor the project's debt. The rating also considers the potential for uncompensated curtailment by the offtaker or interconnection agent. The 'AAA' rating of the guaranteed notes reflects the U.S. Department of Energy (DOE) guarantee for timely debt service payments.
Fully Contracted Revenues - Revenue Risk- Price: Midrange
The project has three fixed-price power purchase agreements (PPAs) with a strong utility, SCE, that effectively mitigate price and demand risk for the project's output through debt maturity. The project remains exposed to uncompensated curtailment risks.
Strong Operating Agreement - Operating Risk: Midrange
CSF benefits from a 10-year maintenance agreement with GE with availability and power curve warranties, mitigating operating shortfalls in the medium term. Longer term, there are sufficient replacement operators that can step in following the expiration of the operating agreement.
Variable Wind Resource - Revenue Risk- Volume: Midrange
Wind projections are based on six years of on-site wind data helping to reduce long-term forecasting error. Total output in Fitch's combined stress rating case is based on a one-year P90 estimate of electric generation to mitigate the potential for lower-than-expected wind resource over the debt term.
DOE Guarantee for 80% of Total Project Debt - Debt Structure (Guaranteed): Stronger
The 'AAA' rating for the A-1-G certificates and A-2-G loans reflects the certainty of timely debt service payments due to the DOE loan guarantee for 100% of principal and interest on the guaranteed debt.
Typical Debt Structure - Debt Structure (Non-Guaranteed): Midrange
The non-guaranteed debt benefits from a typical debt structure for an investment-grade wind project, including a six-month debt service reserve, operations and maintenance (O&M) reserve, and a 1.20x DSCR distribution trigger. All of the notes have fixed interest rates for the life of the debt, including the A-2 loan which has a floating- to fixed-rate hedge.
Investment Grade Profile
The profile of DSCRs in Fitch's rating case reflects an average of 1.41x, consistent with investment grade. The minimum 1.31x DSCR indicates the project has some cushion to withstand lower wind levels in most years and meets the criteria for an investment-grade wind project.
Consistent with Peers
Average DSCRs under Fitch's rating case scenario are in line with comparably rated wind farms. Continental Wind ('BBB-' with a Stable Outlook) has an average projected DSCR of 1.38x with a minimum of 1.33x under rating case conditions. Alta Wind ('BBB-' with a Stable Outlook) is projected to have DSCRs generally above 1.40x, falling to 1.20x in later years, partially mitigated by an incremental reserve fund to support the back end of the debt when coverage is low.
RATING SENSITIVITIES
Negative - Reduced Energy Sales: Persistent production below one-year P90 projections or sustained curtailment that reduces cash flows to below 1.30x debt service coverage could result in a negative rating action of the non-guaranteed loans.
Negative - Increased Operating Costs: Operating expenses at least 15% above sponsor expectations on a persistent basis could result in a downgrade of the non-guaranteed loans.
Negative - Counterparty Risk: Any rating action on the U.S. sovereign rating would trigger a rating action on the guaranteed debt.
SUMMARY OF CREDIT
CSF is composed of three wind-powered generation projects with aggregate capacity of 845-MW 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.
SECURITY
The rated debt is secured by a first-priority lien on all CSF assets, revenues, contracts, accounts, and equity ownership.
UPDATE
The project achieved a 2014 DSCR of 1.50x consistent with the 2013 DSCR of 1.56x, both of which were in between Fitch's base case and stressed rating case scenarios. Consistent with low wind conditions reported for most of the U.S. this year, first quarter 2015 (1Q15) DSCR declined to 0.77x, though management met the quarterly debt service payment with operating cash reserves. Contributing to the below base-case financial results, 2014 revenues were 13% below budget, while 1Q15 revenues were 52% below budget, partially offset by reduced expenses and liquidated damages payments from the operator for performance shortfalls. Financial performance in 2Q improved to 1.33x DSCR, in line with the minimum investment grade threshold of 1.30x DSCR.
Low wind conditions throughout the Northwest U.S. and curtailment at CSF at 2% of 2014 generation resulted in below-budget energy sales in 2014. As a result, 2014 generation was 3% higher than Fitch's stressed rating case scenario but 12% lower than base case expectations. Electric generation was 52% below budget in 1Q15 due to low wind resource. Energy production shows intermittent signs of improvement, as output was 8.5% below budget in July.
A FERC order issued in October 2014 requires the Bonneville Power Administration to reimburse wind power projects for energy output curtailed to accommodate excess hydro flows, which is expected to mitigate curtailment risk. Further, curtailment due to transmission congestion should abate as transmission upgrades progress, though the expected timeframe for material improvement remains unclear.
Overall project availability was robust at 96.8% in 2014, though below the GE guarantee, resulting in liquidated damages payments from GE to the project. Availability in 1Q15 improved at the three sites to approximately 97%-97.9%. The lower availability was due to maintenance events including transformer repairs and improvements to generator bearings on wind turbine generators that continue in 2015. GE continues to implement the Wind Reserve program designed to limit the effect of downtime at any one turbine and maximize availability of the entire park by allowing slightly higher generation at other turbines without exceeding the contracted capacity.
Fitch has not altered its long-term base and rating case financial projections as most of the project's performance (2012-2014) has been within these scenarios, despite recent performance. Fitch projects base case DSCRs to average 1.75x with a minimum of 1.55x. Fitch's stressed rating case includes one-year P90 generation output, lower availability, and higher costs resulting in an average DSCR of 1.41x with a minimum of 1.31x, which are supportive of the rating. Fitch expects wide variability in wind resource and will monitor the extent to which the project's performance rebounds from recent lows.
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