NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB-' rating on Terra-Gen Finance Company, LLC's (Terra-Gen) $250 million term loan facility ($194.3 million outstanding) and $60 million working capital facility. Fitch maintains the Negative Outlook on both facilities.
The Negative Outlook reflects the near-term weakness in Terra-Gen's financial profile that could result in insufficient distributions from the portfolio's projects.
KEY RATING DRIVERS
Contracted Revenue Base: Revenues are primarily derived from projects with fixed-price power purchase agreements (PPAs) with Southern California Edison (SCE, rated 'A-' with a Stable Outlook by Fitch). Approximately 30% of portfolio capacity is exposed to price volatility under PPAs that derive energy payments through the market-based short-run avoided cost (SRAC) methodology. (Revenue Risk - Price: Midrange)
Adequate Energy Production Forecasts: Energy production forecasts for the wind, solar, and geothermal assets are based largely on actual production data and reasonable assumptions for the technology's performance. The newer Alta wind projects have yet to establish a track record of stable energy output. (Revenue Risk - Volume: Midrange)
Established Operating History: The portfolio consists of various asset types, which all utilize proven technology. Most projects have an extensive operating history and are operated by a subsidiary of the issuer that Fitch considers capable. (Operation Risk: Midrange)
Subordination and Refinance Risk: The Terra-Gen loan facilities are structurally subordinated to project-level indebtedness. Additionally, the term loan will need to be refinanced in approximately four years. Fixed-price contractual revenues and a cash sweep mechanism to reduce leverage are positive factors indicating that Terra-Gen should be able to refinance the term loan facility. (Debt Structure: Weaker)
Financial Coverage Under Pressure: Due to Terra Gen's structural subordination, financial performance is considered on a consolidated basis. Terra-Gen's average consolidated debt service coverage ratios (DSCR) range between 1.00x and 1.30x under several stress scenarios. Notably, a reduction in distributions under a low SRAC environment and adverse conditions at the Alta projects may restrict project-level distributions and could trigger an event of default under Terra-Gen's financial covenants. (Debt Service: Weaker)
RATING SENSITIVITIES
-- Erosion of distributions from portfolio projects due to low energy production, low energy pricing, or other performance factors (e.g. curtailment at Alta);
-- Extensive use of reserve liquidity (debt service reserve facilities);
-- Potential violation of Terra-Gen's financial covenants, such as the DSCR or debt-to-cash available for debt service ratio (debt-to-CADS).
SECURITY
The loan facilities are secured by a first-priority security interest in Terra-Gen's accounts, ownership interests and project dividends.
CREDIT UPDATE
Since reaching financial close in mid-2011, cash flow to Terra-Gen has been below expectations through the combination of lower-than-projected SRAC pricing, curtailments, and low wind production at the Alta projects. In the past several quarters, conditions have improved at the Alta projects but low SRAC pricing persists due to the continued low natural gas pricing environment. Terra-Gen's prior 12-months DSCR in the fourth quarter of 2012 and first quarter of 2013 hovered close to 2.50x, and close to breakeven level on a consolidated basis.
Low market-based SRAC energy prices have resulted in lower distributions at several projects. Fitch expects that geothermal asset Dixie Valley will not meet its near-term project-level distribution tests, likely trapping distributions of approximately $2.5 million (3% of total projected cash flow) for all of 2014. Fitch projects low gas prices to persist over the short-to-medium term, indicating continued pressure on projects exposed to SRAC pricing.
Fitch's base case reflects the expectation for lower market-based SRAC pricing without altering its expectation for long-term energy production at any individual project. In addition to low SRAC pricing, Fitch's rating case introduces additional stresses to wind production and operations and maintenance costs at the Alta projects.
Terra-Gen is particularly susceptible to performance shortfalls at the Alta wind projects II-V (Alta Wind 2010 Pass-Through Trust, 'BBB-'; Stable Outlook), which comprise the primary source of Terra-Gen's cash flow. Under rating case conditions, distributions could be reduced or restricted at the Alta projects, resulting in term loan coverage that falls below the minimum DSCR covenant. Barring an equity cure or lender waiver, this would trigger an event of default due to a breach in the loan's financial covenant.
Fitch also considers Terra-Gen's financial performance on a consolidated basis, as the loan facilities are structurally subordinate to project-level indebtedness. Fitch projects rating-case consolidated DSCRs averaging 1.17x, with coverage close to breakeven levels in 2014. The Negative Outlook reflects that potential underperformance over the next 12 months may result in a breach in financial covenants or a need to access the debt service reserve to meet obligations, any of which could trigger a downgrade of the facilities' ratings. Favorably, rating case results suggest improved metrics more consistent with the current rating after 2014.
Terra-Gen is a special-purpose company formed solely to acquire, own and operate a 1,236 MW portfolio consisting of 22 projects, primarily located in California, that generate power using renewable resources. Nearly 90% of the portfolio's nominal capacity is committed to SCE under various medium- and long-term PPAs. The proceeds of the issuance were used to fully repay pre-existing indebtedness, fund a cash distribution to the sponsors, cash-fund three months of interest within the nine-month debt service reserve, and pay transaction fees and expenses.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
-- 'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012).
-- 'Rating Criteria for Onshore Wind Farm Projects' (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 Projects
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=705018
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=802883
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