-- Following a review of the transaction structure at Alta Wind Holdings LLC we have determined it is robust enough to allow for a wider delinking of its rating from that of its parent, U.S. independent power producer Terra-Gen Finance.
-- We are affirming the ‘BBB-’ rating on Alta and removing it from CreditWatch with negative implications. We are also lowering the corporate credit rating on Terra-Gen to ‘B’ from ‘BB-’ and removing it from CreditWatch negative.
-- Supporting the stable outlook on Alta are the long-term power purchase agreements with Southern California Edison Co.
On Sept. 17, 2012, Standard & Poor’s Ratings Services affirmed its ‘BBB-’ rating on Alta Wind Holdings LLC’s $579.9 million pass-through trust certificates due 2035 and took it off CreditWatch with negative implications, where we placed it on June 29, 2012. The outlook is stable. We also lowered the corporate credit rating on Alta’s parent, Terra-Gen Finance Co. LLC (TG Finance; see related research update published today).
TG Finance owns Alta. Due to an error by Standard & Poor’s when we assigned the preliminary rating to TG Finance in May 2011, together with a subsequent fall in natural gas prices, the credit measures for TG Finance are insufficient, under our criteria, to support the current rating.
We resolved the CreditWatch listing after we reviewed the transaction structure at Alta and determined that it is sufficient to allow for a wider delinking under our criteria from the rating on TG Finance.
Alta owns and operates, through its subsidiaries, four wind power projects (the Alta Wind Projects II through V) totaling 570 megawatts (MW) in the Tehachapi Pass region of California, about 100 miles north of Los Angeles. The Alta projects sell power to Southern California Edison Co. (SCE; BBB+/Stable/A-2) under long-term power purchase agreements (PPA). The PPAs are fixed-price and provide for the sale of 100% of the electricity and renewable energy credits generated through 2035. The fixed price eliminates exposure to fluctuating commodity and power prices. The PPAs provide revenue for energy production only and generally have reasonable performance requirements. Alta is indirectly wholly owned by Terra-Gen Power LLC, which is owned by affiliates of ArcLight Capital Partners LLC (60% interest) and Global Infrastructure Partners (40%).
The ‘BBB-’ rating reflects the following weaknesses: -- Cash flow. The cash flow from each project depends directly on energy production that relies on wind resources. Wind is seasonal in nature and beyond management’s control. -- Reliance on one type of wind turbine technology. Although the Vestas V90 turbines are commercially proven, any future serial defect or maintenance/spare parts issues arising after the turbine warranties expire could result in lower revenues and increased costs. The certified design life of the V90 is 20 years, about five years short of debt maturity. -- Operation and maintenance (O&M) cost forecasting. Although the project’s base case model budget shows O&M costs rising above the annual inflation assumption, recent experience for other U.S. wind projects has shown that O&M costs for this industry can rise far above inflation.
The following strengths partly offset the weaknesses at the ‘BBB-’ rating level: -- PPAs through 2035 with SCE cover all production and eliminate price risk, but not volume risk. -- The large body of historical wind data that is on-site and near hub-height helps ensure that the wind resource forecast of independent engineer Garrad Hassan is achievable, which underpins the consultant’s wind resource report. There are 25 years of operating history behind wind projects in the Tehachapi region, and sponsor Terra-Gen Power has about eight years of wind data at the project sites. -- V90s have five years of commercial experience, and Vestas will support turbine operation through supply, service, and maintenance agreements that include performance requirements, backed up with penalties. Garrad Hassan expects the turbines to last for 30 years, exceeding the turbines’ debt maturity and certified life. -- Low transmission risk. SCE has completed segments of the 4,500 MW Tehachapi Renewable Transmission Project that will support the four projects. -- Good financial performance under a likely set of assumptions; debt service coverage ratio (DSCR) at the 90th percentile confidence level of 2.81x average and 1.40x minimum. However, the rent service coverage ratio (RSCR) at the 90th percentile confidence level is only 1.40x the minimum and average, which is weak compared with similarly rated peers. The debt is fully amortized during the PPAs’ term. -- Regulatory and legislative support in California for renewable energy sources help to mitigate renegotiation risk for the PPAs.
There is a six-month O&M reserve ($9 million) and six months’ rent reserves for debt and equity rent. On Jan. 1, 2031, the rent reserve will go up by $26 million, about another six months of reserves. The increase will be funded by a monthly contribution beginning four years prior, at about 25% of the additional requirement per year. The reserves are adequate at the investment-grade level, but the limitation in the debt service reserve to six months through 2030 is weak.
Supporting the stable outlook are the long-term PPAs with SCE that get support from state regulations and reasonable expectations for wind resource and turbine performance. Under our base case we expect the RSCR to average 1.4x through debt maturity. An upgrade would require high confidence in the long-term wind resource, turbine performance, and O&M costs, which should translate into higher average RSCRs of about 1.75x through debt maturity. Such an upgrade would be unlikely until the projects are operational for some time. A downgrade could occur if wind production and turbine performance do not meet our expectations, offtaker ratings decline, costs escalate faster than we expect, or regulatory support for renewable resources declines. This would be reflected in average RSCRs of around 1.3x through debt maturity.
Related Criteria And Research -- Project Finance Construction and Operations Counterparty Methodology, Dec. 20, 2011 -- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007 -- Criteria For Special-Purpose Entities In Project Finance Transactions, Nov. 20, 2000 Ratings List Rating Affirmed; Off CreditWatch To From Alta Wind Holdings LLC $579.9 mil trust certificates BBB-/Stable BBB-/Watch Neg