Moody's assigns Ba3 to Northeast Wind Capital's senior secured debt; outlook stable
New York, August 05, 2013 -- Moody's Investors Service has assigned a Ba3 rating to Northeast Wind Capital II, LLC's ("NWC" or "the Borrower") proposed $385 million of senior secured first lien credit facilities. The facilities consist of a $325 million senior secured first lien term loan due 2020 and a $60 million senior secured first lien revolving letter of credit (LOC) facility due 2018. This is the first time Moody's is rating NWC. The rating outlook is stable.
NWC is a wholly-owned subsidiary of Northeast Wind Capital Holdings LLC (Holdings), which owns 100% of the equity interests in the Borrower and is a 100% owned subsidiary of Northeast Wind Partners II, LLC (the Northeast JV), a joint venture 51% indirectly owned by First Wind Holdings, LLC (First Wind: not rated) and 49% by Emera Inc. (Emera: not rated). The Northeast JV owns nine operating wind projects in the Northeast with a combined generating capacity of 419 megawatts (MWs). Cash flows generated from these assets will be the sole source of repayment for the credit facilities.
Proceeds from the term loan will be used by the Borrower to repay approximately $300 million of debt currently outstanding within the Northeast JV. Upon completion of the proposed financing, all nine projects will be debt-free; however, two projects (Mars Hill and Bull Hill) will continue to be a party to a tax equity and sale-leaseback structure, respectively, each of which will call on the respective project-level cash flow.
The revolving credit facility will be used for the issuance of letters of credits to support project-level obligations, to fund a 6-month debt service reserve account, and for a $10 million major maintenance reserve account.
The Ba3 rating is supported by the fairly high degree of contracted cash flows that are expected to be generated from the Northeast JV's portfolio of operating wind projects and provided to the Borrower to meet its debt service requirements. The rating also takes into consideration our assessment of the strong political and regulatory support for renewable energy in the northeastern US.
These credit positives are balanced by certain operating challenges facing the Northeast JV and projected key financial metrics that in combination, position NWC somewhat weakly in the Ba3 rating category.
The nine projects owned by the Northeast JV have entered into off-take agreements of various tenors and structures with multiple credit-worthy counterparties. These contractual arrangements are largely fixed priced and include purchase power agreements (PPA's), financially-settled energy swaps (Swaps) and renewable energy credit purchase and sales agreements (RECs). The tenor of the PPA's and Swap's typically extend through 2019; however, a fairly large portion of the RECs are short-term in nature reflecting in part a lack of liquidity in that market.
According to our estimates and utilizing the P90 case as a starting point, about 90% of the aggregate expected cash flows available for debt service to be generated by the Northeast JV in 2014 and 2015 will be from existing contractual arrangements, declining to approximately 70% in 2016, 56% in 2017 and 50% in 2018. These percentages provide a fair degree of cash flow predictability and score within the Ba range under the Rating Methodology for Power Generation Projects (the Methodology) published in December 2012. Moreover, we calculate that contracted cash flows alone under the P90 case are expected to cover mandatory debt service (interest plus 1% annual principal amortization) by at least 1.0 times through 2017.
The appreciable decline in the percentage of contracted cash flows beginning 2017 is driven by the maturity of the short-term RECs. The rating, however, recognizes the political and regulatory support for renewable energy in the Northeast, a credit positive. Specifically, all of the states where the Northeast JV's assets are located (along with the neighboring states) have either mandatory or voluntary renewable portfolio standards. Given these standards, the limited risk of change to these requirements, and the barriers to entry for new renewable resources in this region, we expect First Wind to be able to continue to enter into incremental replacement RECs during the remaining tenor of the financing.
Key risks include the termination last February of operating and maintenance (O&M) and warranty agreements with Clipper Windpower, LLC (Clipper), gearbox failures at the Clipper turbines, and utility curtailment issues at three Maine plants, Stetson I & II and Rollins. While steps have been taken to mitigate each of these items, they represent significant and ongoing risks for the Northeast JV and could, if unresolved, negatively impact the Borrower's rating.
Four of the Northeast JV's projects (Cohocton, Steel Winds I, Steel Winds II and Sheffield) utilize Clipper turbines. Collectively, these projects account for approximately 200 MWs of the 419 MWs of generating capacity in the joint venture and more than 30% of total projected cash flows. Clipper's restructuring, which occurred in 2012, ultimately led to the release of the manufacturer from its warranty claims and the projects transitioning their O&M and parts supply arrangements from Clipper to affiliates of First Wind during the first quarter of 2013. We understand that providing O&M and part supply services to wind projects represents a new business activity for First Wind, which adds to this concern. To mitigate this issue and increase the level of worker experience performing turbine maintenance, First Wind has hired 11 former Clipper turbine technicians who have been relocated to the various projects.
Additionally, the Northeast JV portfolio has been experiencing gearbox failures at its Clipper sites. For example, since the beginning of 2013, six gearboxes have failed at Cohocton and one has failed at the Steel Winds which follows five gearbox failures in 2012 occurring at Cohocton.
Because of the termination of the Clipper warranty, the total cost to refurbish each gearbox failure (estimated by the Borrower to be approximately $650,000 per incident) is incurred by the respective project. The Northeast JV's strategy to mitigate the financial implications associated with gearbox failures includes a First Wind affiliate warehousing five spare gearboxes to minimize outage time and replacing bearings during the refurbishment process with those from a more reliable vendor. Also, Northeast JV's near-term projections for O&M assume significant yearly gearbox refurbishments and related costs (nine in 2014, seven in 2015 and five in 2016) which is intended to address this issue. NWC will have access to a $10 million major maintenance reserve account to provide liquidity support for higher-than-anticipated levels of gearbox failures.
Importantly, the remaining Northeast JV's projects utilize either General Electric (GE) or Vestas turbines (with 84% of the remaining MWs in the portfolio being GE turbines) and each project is party to a long-term operating and maintenance services and warranty coverage with their respective turbine manufacturer, which provides some balance to the Clipper exposure.
Curtailment risk is another challenge affecting the company as three of the Northeast JV's projects located in Bangor-Hydro's service territory in northern Maine, Stetson I&II and Rollins, have been curtailed by ISO-NE since 2012. The curtailment of the projects has been caused by transmission constraints and has reduced their respective generation outputs and cash flows. The Northeast JV, however, appears to have identified a fairly low-cost solution to remedy the constraint and the approach appears to have the support of both Bangor-Hydro and ISO-NE. Additional comfort is gained by the fact that even though curtailment risk during 2012 at Stetson I&II reduced production to levels consistent with the one-year P99 scenario, the projects were able to generate enough electricity to satisfy required contractual obligations with its respective counterparties. Assuming regulatory approval to implement the fix, which involves re-terminating Stetson and Rollin's existing transmission line, the curtailment issue could be remedied as early as the first quarter 2014.
From a financial modeling perspective, key assumptions used in management's base case include one-year P90 production levels, merchant REC pricing assumptions provided by the market consultant and gearbox refurbishment at $650,000 per incident, escalating 2% annually. In Moody's base cases, we also assume one-year P90 production levels, but with lower REC merchant pricing assumptions, higher gearbox refurbishment costs and more onerous assumptions relating to the curtailment of Stetson and Rollins. Financial results in the cases examined do not differ materially given the high degree of contracted cash flows through 2016. The resulting key financial metrics of FFO to debt and debt service coverage ratio in these scenarios range between 6-11% and 1.9 times-2.2 times, respectively, during the period 2014 through 2017, which score in the "B" rating category under the grid in the Methodology.
The one exception is the Northeast JV's anticipated debt-to- capitalization ratio, which in all cases examined scores in the Baa rating category, reflecting somewhat modest leverage.
Lenders will be protected by fairly traditional project financing structures, including a trustee administered waterfall of accounts, a six month debt service reserve, a major maintenance reserve account and a quarterly sweep of 50% of excess cash flow to be used to repay debt. There will also be a minimum debt service coverage requirement of 1.1 times.
All obligations under the credit facilities will be guaranteed by Holdings and each of the Borrower's existing and subsequently acquired or wholly-owned direct and indirect subsidiaries with the exception of subsidiaries that own Mars Hill and Bull Hill, which are subject to tax equity and sales leaseback structures. The credit facilities will be secured by a first priority security interest in the equity interest of each of the Borrower's existing and subsequently acquired or wholly-owned direct and indirect subsidiaries. Lenders will be supplied by a negative pledge that will not permit the subsidiaries to incur obligations secured by their assets, subject to customary exceptions.
Terms of the JV require that development projects identified by First Wind, should they meet certain eligibility criteria, must transfer to the Northeast JV. This was the case with Bull Hill, a Maine project that achieved commercial operation in 2012. First Wind has the ability to transfer up to an additional 1,166 MW of new projects into the Northeast JV. To help facilitate this goal, the financing has been structured to provide the flexibility to add incremental pari- passu term loan debt to refinance incremental qualified projects added to the Northeast JV.
While Moody's does not rate First Wind, it rates its affiliate First Wind Capital, LLC (B3 Corporate Family Rating, positive outlook). While this affiliate carries a deeply speculative grade rating, we believe that terms of the joint venture structure insulate lenders from any related family contagion risk. Specifically, the LLC Agreement requires that the Northeast JV be managed by a Board of Managers consisting of five managers, three appointed by First Wind and two by Emera. Certain actions by the Board, such as the voluntary filing of any bankruptcy petition, requires the approval of at least four of the managers.
The ratings are predicated upon final documentation in accordance with Moody's current understanding of the transaction and final debt sizing and model outputs consistent with initially projected credit metrics and cash flows.
Northeast Wind Capital II (NWC) is a wholly-owned subsidiary of NewCo Holdings LLC, which owns 100% of the equity interests in NWC and is a 100% owned subsidiary of Northeast Wind Partners II, LC (the Northeast JV).
Formed in 2012, Northeast JV is 51% owned by First Wind and 49% by Emera. First Wind serves as the managing partner and operates the wind projects; Emera's affiliate Emera Energy provides energy management services.
The principal methodology used in this rating was Power Generation Projects published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Chee Mee Hu
MD - Project Finance
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
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