June 29, 2012 / 9:44 PM / 8 years ago

TEXT-S&P affirms First Wind Capital LLC

Overview
     -- On June 15, 2012, First Wind Capital closed its transaction with Emera 
Inc. ("Emera", BBB+/Negative/--) to form a joint venture (the Northeast JV) 
that will own and operate First Wind Capital LLC's (FW Capital)  Northeast 
projects. Emera invested a total of $211 million in the Northeast JV, higher 
than the $190 million that was originally contemplated.  
     -- At the same time, Emera replaced Albert Investment Management (AIMCO) 
as the PIK (Payment-In-Kind) lender to the Northeast JV projects, reducing PIK 
loan costs. The new $150 million PIK loan is due June 2017.
     -- We are removing the CreditWatch with negative implications. The 
outlook is stable.
     -- We are affirming First Wind's 'B-' CCR and '1' recovery rating on the 
$200 million senior secured notes.

Rating Action
Standard & Poor's Ratings Services affirmed its 'B-' corporate credit rating 
on First Wind Capital LLC and removed the rating from CreditWatch with 
negative implications. The outlook is stable. The recovery rating on the 
senior secured notes remains '1' (90% to 100%), indicating a high expectation 
of recovery. The issue rating on First Wind Capital's $200 million senior 
secured notes is 'B+'.
Rationale
On June 15, 2012, FW Capital announced that it closed an agreement with power 
and utilities company Emera to jointly build, own, and operate wind energy 
projects in the Northeast U.S. (the "Northeast transaction"). FW Capital has a 
385 MW portfolio of wind energy projects in that region, including eight 
operating projects. These assets are now part of a newly established operating 
company (Northeast JV Co.) of which FW Capital owns 51%. Emera owns the 
remaining 49% of Northeast JV. FW Capital used the $174 million net proceeds 
from this transaction to make a $120 million distribution to First Wind 
Holdings, FW Capital's parent. The remaining $54 million was used to pay off 
$30 million intermediate holding company loan. The remaining cash is now at FW 
Capital. In total, FW Capital now has $41 million in cash on hand, along with 
a $12 million cash-funded debt service reserve. We consider this cash on hand 
a liquidity buffer which we view as a key contributor to the portfolio's 
credit quality. 

We analyze FW Capital according to our project developer criteria. Like other 
project developers, FW Capital relies on cash flow from its subsidiaries to 
repay debt. Therefore, a critical element in our evaluation of the company's 
credit is the assignment of a quality-of-cash-flow (QCF) score to each source 
of cash flow upstreamed to FW Capital. The QCF score reflects our opinion of 
the potential volatility of such cash flows, ranging from '1' to '10', with 
'1' being the most certain and '10' being the most volatile. We conclude that 
FW Capital's overall QCF is "somewhat uncertain," as defined in our criteria, 
with a weighted-average score of '5' to '6'. On the financial side, debt 
sustainability credit measures are typical of those of a highly leveraged 
corporate issuer, with issuer-level cash flows barely covering interest-only 
debt service and considerable refinancing risk when the notes mature in 2018. 

FW Capital continues to build projects on time and on budget. In the past 12 
months, four projects -- including Rollins, Sheffield, Steel Wind II, and KWP 
II -- have achieved commercial operations. In addition, projects currently 
under construction -- including Bull Hill, Palouse, and Kawailoa -- have 
entered into long-term power purchase agreements  These agreements will likely 
provide a more stable source of revenues, and thus more predicable 
distributions to FW Capital, when construction is completed, which is 
anticipated by November 2012. All operating projects continue to perform above 
our base-case expectations, with the wind resource typically exceeding 
management's P50 forecast.

Recovery Rating
In arriving at a hypothetical default, we have stressed the S&P base case by 
assuming that operating and maintenance costs increase by 25%, and Clipper 
turbines operate at 85% availability. These are harsh conditions aimed at 
reaching a hypothetical default, as is typical for our recovery analysis, but 
are not reflective of our base-case assumptions. Under this hypothetical 
scenario, the liquidity at FW Capital would be extinguished during 2016, 
leading to a payment default. The LOC facility will be cross-defaulted with 
the notes. 
Under this scenario, distributions to FW Capital post-default have an 
enterprise value of around $202 including 5% administrative fees. This leads 
to a '1' recovery rating of FW Capital's outstanding principal at default plus 
around $12 million of prepetition interests, indicating "very high" 
expectations of recovery of principal in a default scenario

Liquidity
At First Wind Capital, liquidity is sufficient to cover its remaining 
construction needs for its three projects in construction. Currently, the 
company has $41 million cash on hand, in addition to its $12 million debt 
service reserve account. The company has been successful in obtaining external 
financing for its projects to-date, and given that the company has a strong 
track record of building wind farms on time and on budget, we feel that 
funding at the individual asset level is sufficient through 2012.  
Outlook
The stable outlook reflects our expectation that FW Capital will continue to 
progress with its construction projects on time and on budget, resulting in 
980MW of wind capacity in operations by the end of 2012. Under our base-case 
scenario, we expect cash flows from operating subsidiaries to barely cover FW 
Capital's interest expenses until the notes' final bullet maturity in 2018. We 
expect cash at FW Capital to appropriately cover any minor shortfall. Any 
deterioration in liquidity such that FW Capital taps its $12 million debt 
service reserve would likely lead to a lowered rating, whether the 
deterioration was due to larger equity investments in new projects than we 
assumed under our base-case scenario, wind or turbine underperformance, 
material construction delays, or cost overruns. 

We see little potential for a raised rating, given the low coverage ratios 
under our base-case scenario until the notes' final maturity, the weak cash 
retention mechanism provided by the indenture, and the considerable 
refinancing risk, however if the company were to achieve and sustain debt 
service coverage of 1.5x through debt maturity under our base-case scenario, 
we could raise the rating.
Related Criteria And Research
Rating Criteria For Project Developers, published Sept 30, 2004
Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
                                        To                 From
First Wind Capital LLC
 Corporate Credit Rating                B-/Stable/--       B-/Watch Neg/--

First Wind Capital LLC
 Senior Secured                         B+                 B+/Watch Neg
 Recovery Rating                        1                  1
0 : 0
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