Fitch Expects to Rate FPL Energy National Wind Opco 'BBB' and Holdco 'BB'

Business Wire, Feb 9, 2005

CHICAGO -- Fitch Ratings expects to assign ratings of 'BBB' and 'BB' to FPL Energy National Wind, LLC's (the Opco) $351 million senior secured indebtedness due 2024 and to FPL Energy National Wind Portfolio, LLC's (the Holdco) $100 million senior secured indebtedness due 2019, respectively. The Holdco owns 100% of the Opco and, in turn, is a wholly owned indirect subsidiary of FPL Group Capital, Inc. (FPL Group, rated 'A' by Fitch). The purpose of the proposed financing is to recapitalize a portfolio of wind farms constructed with members' equity. After funding reserve accounts and paying transaction costs, the net proceeds of the issuance will be distributed to FPL Energy, LLC, the sponsor.

The Opco is a portfolio of nine operating wind farms with an aggregate capacity of approximately 534 MW. Each project company is wholly owned by the Opco and is otherwise unencumbered with project-level indebtedness. All of the output of each wind farm is committed under long-term power purchase agreements (PPAs) with counterparties that are unaffiliated with the Opco. Under the agreements, the Opco generally receives a fixed-energy price for all energy produced by the wind farm, and the counterparty generally pays all costs associated with transmission and scheduling.

The Holdco is a special-purpose vehicle formed to own 100% of the Opco. Distributions from the Opco are the Holdco's sole source of revenues. Neither the Opco nor the Holdco has any employees. Operations and maintenance activity will be the responsibility of an affiliate, FPL Energy Operating Services, Inc. Management and overhead functions will be performed by other affiliated entities.

Rating Rationale

The rating of the Opco bonds is based on the stand-alone credit quality of the Opco, which is derived from the aggregated cash flow generated from the nine wind farm assets and protections in the project indenture. Fitch believes the circumstances of the portfolio, including number of turbines, maintenance requirements, and experience of the sponsor, suggest that a gradual erosion of cash flow or a temporary increase in expenditures is unlikely. Accordingly, Fitch believes the portfolio can withstand debt-service coverages in a stress scenario that are lower than typically observed in the rating category.

Fitch views the structural subordination of the Holdco debt as commensurate with deeply subordinated debt of the Opco. Fitch's policy for deeply subordinated debt requires a three-notch differential between the ratings of the senior and subordinate debt unless other circumstances suggest greater notching. Distribution tests at the Opco and consolidated coverage of the combined Opco and Holdco debt service suggest that the minimum three notches are appropriate.

The sponsor's outside counsel will provide an opinion that in the event of a bankruptcy of the Holdco's direct and indirect owners, the assets and liabilities of the Holdco would not be consolidated with those of its owners under the federal bankruptcy laws. Furthermore, in the event of a bankruptcy of the Holdco, the assets and liabilities of the Opco would not be consolidated with those of the Holdco. Accordingly, Fitch views the credit quality of the Opco and Holdco to be structurally independent of the rating of its owners.

Although the ratings are not directly linked to the ratings of the sponsor, the credit quality of the sponsor is considered a constraint on the rating of the Opco. FPL Group guarantees an average of approximately 40% of annual Opco revenues over the first eight years of the debt life, and affiliated companies manage the operations of the facilities. In the event the future rating of the sponsor deteriorates below the stand-alone credit quality of the Opco, the ratings of the Opco and Holdco bonds will likely be constrained by the then-current rating of FPL Group.

The rating of the Opco incorporates the following strengths and concerns.

Primary credit strengths:

-- The portfolio provides significant equipment, technology, and regional diversity;

-- The maintenance requirements of wind turbines minimize the potential for unexpected costs;

-- Substantially all revenues are derived under fixed-price arrangements;

-- Revenues are derived from counterparties with a strong investment-grade profile;

-- The transaction structure incorporates meaningful liquidity to minimize technology risks;

-- The sponsor is reported to own the largest fleet of wind turbines in the U.S. and has publicly stated a long-term strategy in the sector.

Primary credit concerns:

-- The financial projections rely on wind data collected over a short period of time;

-- The portfolio and certain turbine models have a limited operating history.

Financial Analysis

In the sponsor's base case, annual DSCRs for the Opco gradually rise to 2.2 times (x) at maturity from 1.7x with an average of 1.8x. Consolidated annual DSCRs for the combined Opco and Holdco debt are approximately 1.3x in all years until the maturity of the Holdco debt. The sponsor's base case incorporates conservative modeling assumptions for several wind farms. Fitch believes there are credible arguments that the sponsor's base-case cash flows could be stronger in the long term than indicated in the projections.