Fitch Affirms Shepherds Flat Senior Secured Trust Debt; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following ratings for Caithness Shepherds Flat, LLC's (CSF) total $1.2 billion pari passu project debt:

Shepherds Flat Funding Trust I:

--$420 million series A-1-G senior secured fixed-rate trust certificates at 'AAA'; ($420 million outstanding) due 2032;

--$105 million series A-1-a senior secured fixed-rate trust certificates at 'BBB-'; ($105 million outstanding) due 2032.

Shepherds Flat Funding Trust II:

--$540 million A-2-G senior secured floating rate loan at 'AAA'; ($366.6 million outstanding) due 2024;

--$135 million A-2-a senior secured floating rate loan at 'BBB-'; ($91.7 million outstanding) due 2024.

The Rating Outlook for all debt tranches is Stable.

KEY RATING DRIVERS

The affirmation of the 'BBB-' rating on the non-guaranteed project debt is based on the project's adequate financial performance with debt service coverage ratios (DSCR) averaging 1.48x from 2012 - 2015. Inconsistent wind resources introduce quarterly volatility, with 1Q 2015 coverage near breakeven, but annual coverage exceeding investment grade thresholds. Fitch projects long-term performance to be in line with the current rating. The project's debt is anchored by long-term revenue contracts with a highly rated offtaker, Southern California Edison (SCE 'A-' with a Stable Outlook) and strong operator, GE. The rating also considers the potential for curtailment by the offtaker or interconnection agent. The 'AAA' rating of the guaranteed notes reflects the U.S. Department of Energy (DOE) guarantee for timely debt service payments. The Outlook for all debt tranches is Stable based on signs of improving near-term financial performance.

Fully Contracted Revenues - Revenue Risk- Price: Midrange

The project has three fixed-price power purchase agreements (PPAs) with a strong utility, SCE, that effectively mitigate price and demand risk for the project's output through debt maturity. The project remains exposed to curtailment risks.

Strong Operating Agreement - Operating Risk: Midrange

CSF benefits from a new maintenance agreement with GE whose expiration coincides with debt maturity. The agreement maintains availability and power curve warranties, mitigating operating shortfalls in the medium term.

Variable Wind Resource - Revenue Risk- Volume: Midrange

Wind projections are based on six years of on-site wind data helping to reduce long-term forecasting error, but actual production has been more volatile than expected. Total output in Fitch's combined stress rating case is based on a one-year P90 estimate of electric generation to mitigate the potential for lower-than-expected wind resource over the debt term.

DOE Guarantee for 80% of Total Project Debt - Debt Structure (Guaranteed): Stronger

The 'AAA' rating for the A-1-G certificates and A-2-G loans reflects the certainty of timely debt service payments due to the DOE loan guarantee for 100% of principal and interest on the guaranteed debt.

Typical Debt Structure - Debt Structure (Non-Guaranteed): Midrange

The non-guaranteed debt benefits from a typical debt structure for an investment grade wind project, including a six-month debt service reserve, operations and maintenance (O&M) reserve, and a 1.20x DSCR distribution trigger. All of the notes have fixed interest rates for the life of the debt, including the A-2 loan which has a floating to fixed rate hedge.

Investment Grade Profile

The profile of DSCRs in Fitch's rating case reflects an average of 1.40x, consistent with investment grade. The minimum 1.30x DSCR indicates the project has some cushion to withstand lower wind levels in most years and meets the criteria for an investment grade wind project.

Consistent with Peers

Average DSCRs under Fitch's rating case scenario are in line with comparably rated wind farms. Continental Wind ('BBB-'/Outlook Stable) has an average projected DSCR of 1.38x with a minimum of 1.33x under rating case conditions. Alta Wind ('BBB-'/Outlook Stable) is projected to have DSCRs generally above 1.40x falling to 1.20x in later years, partially mitigated by an incremental reserve fund to support the back end of the debt when coverage is low.

RATING SENSITIVITIES

Negative - Reduced Energy Sales: Persistent production below P90 projections or sustained curtailment that reduces cash flows to below 1.30x debt service coverage could result in a negative rating action of the non-guaranteed loans.

Negative - Increased Operating Costs: Operating expenses at least 15% above sponsor expectations on a persistent basis could result in a downgrade of the non-guaranteed loans.

Negative - Counterparty Risk: Any rating action on the U.S. sovereign rating would trigger a rating action on the guaranteed debt.

SUMMARY OF CREDIT

CSF is comprised of three wind-powered generation projects with aggregate capacity of 845-MW located along the Columbia River Gorge in Gilliam and Morrow Counties, Oregon. CSF was developed by Caithness, and is owned jointly by Caithness, GE Energy Financial Services, Google Inc., Sumitomo Corporation of America, and Tyr Energy.

SECURITY

The rated debt is secured by a first-priority lien on all CSF assets, revenues, contracts, accounts, and equity ownership.

UPDATE

The project achieved a 2015 DSCR of 1.30x, which was the minimum investment grade threshold for Fitch's rating case scenario. 2015 revenues were 25% below budget, though partially offset by reduced expenses and liquidated damages payments from the operator for availability shortfalls. While 1Q2016 DSCR declined to 1.02x with net revenues 40% below budget, financial performance in 2Q2016 improved to approximately 1.77x DSCR, resulting in 1.5x over the last 12 months.

Low wind conditions throughout the Northwest U.S., particularly in 1Q2015, resulted in below budget energy sales in 2015. As a result, 2015 generation was 11% lower than Fitch's base case expectations. Low wind resource persisted in 1Q 2016 with electric generation 42% below budget. Energy production shows intermittent signs of improvement, as output was 3.5% above budget in Q2. Curtailment reduced to 0.8% of production in 2015 from 2% in 2014, slightly mitigating the impact of relatively lower wind resource. Curtailment due to transmission congestion should continue to abate as transmission upgrades progress, though the expected timeframe for material improvement remains unclear.

Overall project availability was robust at 97% in 2015, though below the GE guarantee, resulting in liquidated damages payments from GE to the project. Availability in 1Q2016 and 2Q2016 improved at the three sites to slightly over 98%. Through the new full services agreement (FSA), GE continues to implement the Wind Reserve program designed to limit the effect of downtime at any one turbine and maximize availability of the entire park by allowing slightly higher generation at other turbines without exceeding the contracted capacity.

Fitch adjusted its 2016 base and rating cases projections by considering Q1 and Q2 actual electric generation and projecting output for the remainder of the year. Fitch has reduced its 2016 base case DSCR projection to 1.40x, supported by annual generation 12% below the P50 in Fitch's original base case for the second half of the year. The 2016 rating case results in a minimum investment grade DSCR of 1.30x, based on generation 7% below the one-year P90 in the original rating case, applied to the second half of the year as well. Fitch has not altered its long-term base and rating cases financial projections as the project's annual financial performance (2012-2015) has been within the investment grade threshold. Fitch projects base case DSCRs to average 1.75x with a minimum of 1.55x. Fitch's stressed rating case includes one-year P90 generation output, lower availability, and higher costs resulting in an average DSCR of 1.40x with a minimum of 1.30x, supportive of the rating. Fitch expects wide variability in wind resource and will monitor the extent to which the project's performance rebounds from recent lows.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882594

Rating Criteria for Wind Projects (pub. 31 Mar 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878936

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009734

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009734

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160729005828/en/

Fitch Ratings, Inc.
Primary Analyst
Yvette Dennis
Senior Director
+1-212-908-0668
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Matthew Reilly
Director
+1-415-732-7572
or
Committee Chairperson
Greg Remec
Senior Director
+1-312-606-2339
or
Media Relations
Sandro Scenga, +1-212-908-0278
[email protected]

Source: Fitch Ratings

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