Fitch Affirms FPL Energy National Wind Opco and Holdco; Outlook Remains Negative
--Opco $365 million ($59.8 million outstanding) senior secured indebtedness due 2024 at 'BB';
--Holdco $100 million ($3.4 million outstanding) senior secured indebtedness due 2019 at 'B-'.
The Outlook remains Negative for both tranches of debt.
The ratings are anchored by a diverse wind regime generating revenues under fixed-price long-term power purchase agreements (PPA). Historical wind volatility and increased operating costs have reduced cash flows below initial estimates. Rating case financial performance reflects a near-term downturn that is below the current 'BB' rating for the Opco, while the long-term profile demonstrates metrics supportive of the rating. The Holdco's rating case reliance on reserves to support debt repayment through 2018 provides a limited margin of safety consistent with the 'B-' rating. The Negative Outlooks reflect that without successful completion of structural repairs at one of the wind farms, the potential for extended underperformance could further erode financial performance.
KEY RATING DRIVERS
Fully Contracted Revenues - Revenue Risk- Price: Midrange
Revenues are derived under fixed-price long-term contracts for a portfolio of eight wind farm projects totalling 389.6 megawatts (MW). The credit quality of the offtakers, which are investment grade, does not actively constrain the current ratings.
Revised Production Estimates - Revenue Risk- Volume: Weaker
Actual wind resource performance has fallen persistently below the original P50 estimate. The project benefits from geographic diversification but any portfolio effect has not fully mitigated generation losses from reduced wind speeds overall. Revised projections exclude one divested portfolio project and utilize an updated P50 forecast based on actual performance, which is on average 10% below the original P50.
Stabilizing Operating Profile - Operating Risk: Midrange
Operating and maintenance (O&M) expenses have persisted well above the original base case. Fitch's projections utilize the increased actual historical O&M cost in the base case with additional stress applied in the rating case for the later years. The project has historically maintained solid high availability with an average of 94.4% portfolio-wide since 2005.
Debt Structure - Debt Structure: Midrange (Opco)/Weaker (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 past twelve months and projected six months at 1.10x helps to ensure timely debt payment at Opco. Under a cash trap scenario, however, the Holdco debt is fully reliant on limited cash reserves.
Limited Financial Cushion
Financial performance has been lower than original projections due to reduced energy revenues and higher operating costs. Fitch's rating case adds the planned repair cost for 2015 and 2016, a 9% - 12% reduction to output and a 10% increase to O&M expenses. The Opco rating case average debt service coverage ratio (DSCR) is 1.34x with a minimum of 1.14x. The DSCR approaches break-even on a consolidated basis that includes Holdco debt service. Under the rating case, cash flows are sufficient at Opco to complete necessary maintenance with cash, and Holdco debt service reserves are adequate to support debt payment through 2018, just short of the March 2019 maturity.
Limited Public Peers
Opco and Holdco ratings are lower than publicly rated peers. Fitch rated wind projects that meet the rating case investment grade DSCR threshold of 1.30x include Continental Wind ('BBB-'/ Stable Outlook) with an average DSCR of 1.38x and a minimum of 1.33x, and Caithness Shepherds Flat ('BBB-'/Stable Outlook) with an average DSCR of 1.41x and a minimum of 1.31x.
RATING SENSITIVITIES
Achievement of the milestones in the following rating sensitivities could result in a return to a Stable Outlook. Failure to achieve these milestones could result in a downgrade to the ratings.
Capital Improvements- Successful completion of structural repairs isolated to one of the sites by 2016Q2.
Operating performance- Plant availability and generation in 2016Q2 should show material and sustainable improvement.
Financial Performance- The September 2016 DSCR should be at least 1.20x.
CREDIT UPDATE
Operating performance has declined since 2014. Electric generation in 2014 was 13% below budget, with portfolio availability averaging 90%. Despite similar portfolio availability of about 90% through 2015Q3, electric generation output suffered at about 20% below budget primarily due to three reasons. First, the project has encountered low wind conditions in the western United States, which has adversely affected other wind power projects in Fitch's rated portfolio. Second, the project accelerated $6 million of foundation repairs at one of the wind farms to an estimated 18-month implementation (June 2016) schedule from 25 months (January 2017), resulting in lower plant availability at the wind farm (about 80%) and generation about 50%below budget. Management reports that the design for the repairs was approved by a third-party engineer. Third, three other sites experienced downtime for component failures (including gear box repairs) and a brush fire at one of the sites. Management reports these issues have been resolved.
Low wind conditions and downtime at four of the eight wind farms resulted in a material erosion in cash flow with the 2015 annual DSCR at about 0.90x for the Opco. Cash flow was supplemented with cash on hand to meet the 2015 debt service payment. Holdco met annual debt service with a cash distribution provided by the OpCo in the first half of 2015. The Opco trapped cash thereafter as the project did not meet the distribution test, and the Holdco will rely on cash reserves for its next scheduled debt service payment. The project had previously demonstrated robust financial performance in 2014 with an Opco DSCR of nearly1.60x and a Holdco DSCR of nearly1.40x. Excluding proceeds from the sale of the Wyoming wind farm, the 2014 Opco DSCR would have been approximately 1.40x.
The February 2016 DSCR may be strained below 1.0x prior to completion of structural repairs around the end of June 2016. Opco financial and operational performance is expected to rebound thereafter with base case DSCRs or more than 1.70x. Fitch's rating case for the Opco projects an average DSCR of 1.34x through debt maturity in 2024, which is in line with average historical performance of 1.36x. DSCRs in the rating case are stressed in the early years to an average of 1.16x between 2016 and 2018. In this scenario, cash is trapped at the Opco and unavailable for Holdco debt repayment, which will rely on available reserve funds.
Fitch will monitor whether the Opco performs closer to Fitch's base case expectation, which would allow the Opco to meets its distribution test and release cash to the Holdco by March 2017. Fitch projects that, after this temporary decline through 2018, the Opco DSCR profile should return to 1.22x or greater.
A solid liquidity position should support debt repayment for the Opco during 2016 and help manage the timing of revenues and expenditures. The Opco has $5 million in cash reserves as of September 2015, which is roughly equal to the February 2016 debt payment. A 12-month DSR equal to about $10 million, backed by a letter of credit (LC), provides additional support. The project has not yet tapped into its $15 million O&M reserve but it remains available in the event of unforeseen maintenance activities at any of the sites. There also remains $2 million in the major maintenance reserve, though Fitch's analysis assumes the project will draw most of these funds to support ongoing structural repairs.
Mitigating the potential financial strain, the reserves and the LC are guaranteed by NextEra Energy Capital Holdings, 'NextEra' ('A-'/Stable Outlook). Any draws on the reserves must be replenished through the project's cash flow but there are no required interest payments or established timeframes for replenishment.
The Holdco has adequate liquidity to support debt service through 2018. The sponsor, NextEra, began prefunding Holdco in 2014 by withholding equity distributions to support debt service through 2017. Additional liquidity equal to 12 months of debt service is available in the form of a guarantee from NextEra, which would support Holdco debt service through 2018, six months before the March 2019 debt maturity. With remaining Holdco liquidity, the Opco would need to be able to distribute cash to Holdco to support less than six months of debt service under Fitch's rating case.
The Opco is a portfolio of eight operating wind farms with an aggregate capacity of approximately 389.6 MW (previously 533.5 MW including the 144 MW Wyoming project). 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 PPAs 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-' with a Stable Outlook by Fitch).
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