CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating of Alta Wind 2010 Pass-Through Trust's (Alta) $579.9 million ($515.9 million outstanding) senior secured pass-through certificates due 2035 (the certificates). The Rating Outlook is Stable.
Key Rating Drivers
--Fixed-price contracts: Alta's revenues are derived from a fixed-price power purchase agreement (PPA) with Southern California Edison (SCE; rated 'A-' with a Stable Outlook by Fitch), effectively mitigating volumetric and price risks. State renewable portfolio standards should incentivize SCE to support the PPA, which includes achievable performance requirements. Revenue Risk - Price: Midrange
--Average wind supply risk: Net output could fall below projections due to variability of the wind resource at a non-diversified, single-site project. Fitch's financial analysis takes into account the potential for low wind conditions to negatively affect output. Revenue Risk - Volume: Midrange
--Favorable operating profile: Alta's operating profile benefits from commercially proven technology, a strong turbine warranty, and continued support from the turbine manufacturer under a five-year maintenance agreement. The Alta projects will depend upon the ongoing maintenance of the turbines and balance-of-plant (BoP) to support projected availability. Operation Risk: Midrange
--Back-ended amortization structure: Alta's lenders benefit from a covenant package with terms and conditions typical of similar project finance transactions. Fitch views the incremental reserve funding mechanism, which should effectively increase the debt rent reserve to 12 months, as a positive structural mitigant. The incremental reserve should offset the financial impact of higher scheduled debt service as the pass-through certificates approach maturity. Debt Structure: Midrange
--Investment-grade financial performance: Fitch views financial performance in the Fitch rating case as adequate at the current rating level. In a Fitch rating case that combines lower energy output and availability with higher operations and maintenance (O&M) costs, debt service coverage ratios (DSCRs) generally remain above 1.4x but fall near the 1.2x level between 2032 and 2034. Mitigating factors include the liquidity provided by the incremental debt service reserve mechanism and the relatively short period of below-average coverage. The debt structure compresses approximately 35% of amortization into the final five years of the tenor. Debt Service: Midrange
Rating Sensitivities
--Persistent output shortfalls: Fitch may revise Alta's financial projections if energy output consistently underperforms the original Fitch base case forecast.
--Weak availability: Credit quality could be weaker following a sharp reduction or downward trend in either turbine or BoP availability, particularly if Vestas is unable to fulfill its warranty obligations.
--Failure to build liquidity: If mandated additional reserve funding does not occur as the debt approaches maturity, operating cash flow may be insufficient to support the rating.
Security
The collateral includes a first-priority security interest in the ownership interests in Alta, the leased assets, the owner-lessors' rights under the project documents, including the right to receive rent, and the rights in the accounts. The obligation to pay rent constitutes a secured obligation of the lessees.
Credit Update
Fitch believes that Alta's financial profile has demonstrated a high degree of resilience during a year of multiple temporary stressors. Alta's 2012 financial results fell well below Fitch base case projections due to a combination of counterparty curtailments and poor wind resource conditions. The cash flow impact of low output was partially offset by a favorable property tax assessment, and project availability remains adequate. Fitch calculated a DSCR of 1.25x for 2012, well below the original projection of 1.68x. DSCRs would have exceeded 1.5x absent curtailments.
SCE system upgrade work resulted in severe curtailments during the first half of the year, and SCE also scheduled outages in 4Q'12 to further upgrade the substation that interconnects Alta to the grid. Alta estimates lost output of 187,000 megawatt hours (MWh), or 19% of actual energy production, in 2012. The estimate of lost revenue for the year totals nearly $22 million. The revenue impact was exacerbated by the timing of the curtailments, which primarily occurred during periods of P50 or better wind conditions.
The risk of curtailments may persist as long as SCE is actively engaged in the development of the local transmission system, though that risk has likely moderated with the most intensive upgrade work already performed. While curtailment has fallen sharply for the YTD 2013, lost output has still reached 1.5% of actual production. SCE plans to complete all network upgrades by 2016. SCE has claimed that emergency conditions necessitated the outages, thus avoiding PPA limitations on curtailments. Alta has not received compensation for lost revenues.
Alta's energy output in 2012 lagged the wind consultant's original expectations due to poor wind conditions, though availability remained high. Wind speeds were generally consistent with slightly below P50 performance during the first half of the year but declined precipitously to P99-type conditions in the third quarter. Wind resource performance was indicative of P75 performance for the entire year as a result. Overall availability was in-line with original projections, as turbine and BoP availability averaged 97.8% and 97.7%, respectively, in 2012. Fitch understands the project has not experienced persistent technical issues.
Alta consists of special purpose companies created solely to develop, own, and operate the project, a 570 megawatt wind farm located in the Tehachapi Pass near the town of Mojave in southwestern California. Vestas, the turbine manufacturer, maintains the turbines under a five-year agreement, while an Alta affiliate performs BoP O&M under a separate contract. Alta sells energy output to SCE under a fixed-price PPA expiring Dec. 31, 2035. Alta used the proceeds of the certificates to fund the project's construction and reimburse the sponsor, Terra-Gen Power LLC, for development costs.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance - July 12, 2012
Rating Criteria for Onshore Wind Farms Debt Instruments - April 11, 2013
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Onshore Wind Farm Debt Instruments -- Effective Apr. 20, 2011 to Apr. 11, 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=620109
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794163
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