Approximately $385 Million of Debt Securities Affected
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.
RATINGS RATIONALE
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.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Scott Solomon
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Chee Mee Hu
MD - Project Finance
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns Ba3 to Northeast Wind Capital's senior secured debt; outlook stable
