Oct 1 - Fitch Ratings affirms the 'BB-' rating on Terra-Gen Finance Company, LLC's (Terra-Gen) $250 million term loan facility and $60 million working capital facility. The Rating Outlook is revised to Negative.
The Negative Outlook reflects Terra-Gen's weakening projected 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.
--Limited Portfolio Diversification: Terra-Gen is particularly susceptible to performance shortfalls at the recently completed 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. Portfolio diversity through the other projects partially mitigates operational risks at Alta.
--Structural Subordination: The Terra-Gen loan facilities are structurally subordinated to project-level indebtedness, and repayment is contingent upon sufficient distributions from the portfolio's projects.
--Exposure to Refinance Risk: Fitch views refinancing risk as low, based upon the strong likelihood that Terra-Gen will be able to refinance the term loan facility at maturity in mid-2017 under a stressed refinancing scenario. Despite the elevated risk of a long-term profile, fixed-price contractual revenues and a cash sweep mechanism to reduce leverage are positive factors.
WHAT COULD TRIGGER A RATING ACTION
--Erosion of distributions from portfolio projects due to low energy production, low energy pricing, or other performance factors (e.g. curtailment at Alta);
--Use of reserve liquidity (debt service reserve facilities);
--Potential violation of Terra-Gen's financial covenants, such as the debt service coverage ratio (DSCR) or debt-to-cash available for debt service ratio (debt-to-CADS).
The loan facilities are secured by a first-priority security interest in Terra-Gen's accounts, ownership interests and project dividends.
Following financial close in June 2011, cash flow to Terra-Gen has been below expectations through the combination of lower-than-projected SRAC pricing, frequent curtailments at the Alta projects, and low wind production in 2011 at the Alta projects. Despite lower cash flow from the portfolio's projects, there have been no unexpected instances of restricted distributions due to project-level cash trapping.
The current low gas environment has pushed market-based SRAC energy prices as much as 37% below projected levels, resulting in lower distributions at several projects. Fitch projects low gas prices to persist over the short-to-medium term, indicating that SRAC prices will also remain lower than originally projected.
Fitch has not changed its expectation for future curtailment, as Alta's frequent early-2012 curtailments were due to a now-complete major substation upgrade. Likewise, Fitch has not altered its projections for wind production at the Alta projects, as the wind resource has not displayed significant and sustained deviation from the original wind assessment.
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 to assess Terra-Gen's dependence on distributions from these projects.
Fitch considers Terra-Gen's financial performance on a consolidated basis, as the loan facilities are structurally subordinate to project-level indebtedness. The rating-case consolidated DSCR averages 1.13x, with a minimum 1.00x in 2013. The Negative Outlook reflects that underperformance may result in a need to access reserves to fulfill debt obligations, which would indicate a profile inconsistent with the current rating category.
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 '
'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
(New York Ratings Team)