Fitch Ratings has affirmed Continental Wind, LLC’s (CW or project) $613 million ($494 million outstanding) senior secured notes due 2033 at ‘BBB-’. The Rating Outlook is revised to Positive from Stable.
The Positive Outlook reflects the project’s track record of stable operations with availability, operating expenses, and energy output that have consistently performed favorably compared to base case projections. Similar continuing performance may justify moderated rating case stresses and resulting metrics consistent with a higher rating.
KEY RATING DRIVERS
The rating is anchored by long-term power purchase agreements (PPAs), limited merchant exposure, experienced operators, and a robust wind resource across a diversified portfolio of 13 wind projects. The project has maintained a manageable cost profile and demonstrated strong operating performance that is expected to continue. Financial performance has met expectations with annual debt service coverage ratios (DSCRs) averaging 1.65x over the past four years, while projected DSCRs under stressed rating case conditions average 1.39x, exceeding minimum investment grade thresholds.
Largely Contracted Revenues - Revenue Risk- Price: Midrange
The projects have fixed-price, 20-25 year PPAs for all energy produced, subject to maximum delivery provisions for three Michigan-based projects and the Michigan Midwest Independent System Operator’s Dispatchable Intermittent Resources program. Any energy in excess of the PPA requirements is sold at market prices. Unbundled PPA renewable energy credits (RECs) are sold at fixed prices, while eligible production tax credits (PTCs) are sold to Exelon Corporation (BBB/Stable) at regulated PTC prices subject only to inflation risk.
Manageable Operating Risk - Operating Risk: Midrange
The wind turbine technologies employed by the CW projects are generally considered proven. However, some of the turbine models have experienced component issues in their respective fleets, which the independent engineer (IE) considered typical and correctable. The project’s long operating track record has demonstrated a stable cost profile that is expected to decrease following recent contract changes. Further, component issues are generally considered in production loss factors and cost estimates that are assumed in the projections.
Diverse Wind Resource - Revenue Risk- Volume: Midrange
The original energy production assessments were generally completed with an amount and quality of data consistent with industry standards. The diversity of 13 project sites with multiple wind regimes helps to mitigate collective wind resource volatility. Production forecasts were prepared using post-completion data, which Fitch considers relatively more reliable, and are supported by actual performance. Historical production has generally met or exceeded P50 expectations.
Conventional Debt Structure - Debt Structure: Midrange
The fixed-rate, fully amortizing debt is sculpted to account for the expiration of PTCs, roll-off of PPA RECs, and PPA maturities. Equity distribution restrictions and additional debt provisions are typical of similarly rated wind projects. All reserves have been funded with letters of credit that are pari passu to the senior secured notes.
The Fitch rating case combines lower energy output and availability with a higher cost profile resulting in average and minimum DSCRs of 1.39x and 1.37x, respectively, which are consistent with the indicative threshold for investment grade ratings.
CW’s average DSCRs under Fitch’s rating case scenario are in line with comparably rated wind projects. Caithness Shepherds Flat (BBB-/Stable) has an average DSCR of 1.39x under rating case conditions. Alta Wind (BBB-/Stable) is projected to have a more variable rating case profile, as DSCRs average 2.77x with DSCRs falling within the 1.32x to 1.36x range in the near term and after 2030.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
—Operating performance shortfalls, persistent cost increases and/or low wind performance that results in DSCRs persistently below a rating case minimum of 1.30x.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
—Financial results that continue to exceed base case projections with operational performance that supports energy output consistent with P50 estimates.
CW’s financial performance has been generally consistent with Fitch’s base case projections with a 2017 DSCR of 1.65x. Financial performance in 2017 was driven by stable operating performance, low curtailment, energy output around the P50 level and decreased O&M costs. CW entered into a new maintenance agreement with the turbine manufacturer for the Shooting Star and Whitetail projects that is more competitively priced and is expected to reduce 2018 project costs by $1.8 million in comparison to the 2017 budget.
Portfolio-wide availability was strong at about 98% in 2017, consistent with historical performance, and remained at approximately 98% as of the second quarter of 2018 (2Q18). Energy output in 2017 was 2.2% lower than 2016 and 4.6% below base case, which reflects P50 output levels. The lower output in comparison to P50 modeled production is primarily attributed to the lower wind resource. However, the portfolio’s technical performance has minimized the impact of weaker than expected wind conditions.
The turbine manufacturer began blade remediation activity on the Harvest and Michigan projects in 2017. Work related to the blade remediation is expected to be completed by the end of summer 2018. The turbine manufacture is also working to address recent pitch motor failures at Whitetail and Shooting Star. However, the project is not expected to be adversely affected as the overall portfolio performance remains strong and anticipated impact to availability should be minimal.
Fitch has not materially altered its base case and rating case expectations, as CW’s performance remains in line with Fitch’s original projections. The base case was revised to include a 3% production haircut in accordance with criteria guidance and uses the P50 energy production estimates with a 3% production haircut in all years. A PTC base price of $23 per MWh plus inflationary adjustments was included based on the terms of the Exelon off-take agreement and historical precedent for pricing stability. The terms of the REC off-take agreements were maintained given the contractual obligations of each counterparty. Additionally, merchant energy revenues were included based on the IE’s production estimates. Management’s original cost profile was maintained based on the cost profiles of comparable projects rated by Fitch. DSCRs average 1.70x with a minimum of 1.62x.
The rating case applies a combination of operational and financial stresses to the base case that might occur occasionally but not persist for an extended period of time. The rating case uses the portfolio P90 production estimate with a 3% production haircut in all years to reflect potential measurement bias, availability issues, additional curtailment and a potentially lower than estimated portfolio effect. Only bundled REC revenues were included. Costs were increased by 5% through year 15 and 10% thereafter to account for the uncertainty of long-term cost estimates. DSCRs exceed Fitch’s 1.30x minimum investment grade threshold with an average and minimum of 1.39x and 1.37x, respectively.
Continental Wind is composed of 13 operating wind projects, totaling 666.9 MW of installed capacity, located in six U.S. states with multiple wind regimes. The wind projects were placed in commercial operation between May 2008 and December 2012 using eight turbine models from five manufacturers.
The collateral consists of a first priority security interest in all tangible and intangible assets of the issuer and its project companies, as well as a pledge of Continental Wind Holding, LLC’s membership interest in CW. CW is restricted from selling any assets material to the operation of any project, subject to the terms of the permitted asset sale provision. Fitch notes that any proceeds from permitted asset sales, except non-material assets up to $25 million, must be used to redeem a portion of the notes.
In addition, Exelon Corporation has entered into a tax equity put option exercisable by lenders upon acceleration and equity foreclosure of CW. The put expires upon the earlier of 2023 or the expiry of PTCs, and requires that the off-taker pay the net present value of 99% of any PTCs earned and 5% of distributable cash flows under a one-year P90 estimate using a stressed discount rate. Fitch believes that the put option proceeds are sufficient to fully repay any PTC-related debt outstanding in all years.