Fitch Affirms TerraForm Power Operating's IDR at 'BB-'; Outlook Stable

(The following statement was released by the rating agency)

Fitch Ratings-New York-05 February 2021:

Fitch Ratings has affirmed TerraForm Power Operating LLC's (TERPO) Issuer Default Rating (IDR) at 'BB-' with a Stable Rating Outlook. The rating affirmation considers TERPO's relatively stable long-term contracted and regulated cash flows from a diversified portfolio of renewable projects.

TERPO's publicly-traded parent Terraform Power, Inc. (TERP) was taken private by Brookfield Renewable Partners and affiliates in July 2020. Fitch believes the transaction is largely positive as it reduces administrative costs, removes the pressure of meeting public distribution targets and provides enhanced operational efficiencies as part of a larger renewable platform. However, private ownership can lead to less transparency on financial and operational data.

Expected benefits from privatization partially offset the weak performance at the project level. TERPO's generation assets continue to perform below expectations due to resource and availability issues which remains a key risk.

Fitch expects the company's growth trajectory to moderate in the future. TERPO's rating and Outlook incorporate Fitch's expectation that TERPO will implement its operating plans and capital recycling initiatives in a credit-supportive manner. Fitch expects holding company (HoldCo)-only FFO leverage to hover around 6x over the next two years. We calculate TERPO's credit metrics on a deconsolidated basis as its operating assets are largely financed with nonrecourse project debt.

Key Rating Drivers

Contracted and Regulated Portfolio: TERPO owns and operates 4.2GW of diversified wind and solar assets located primarily in the U.S. and Spain. Approximately 59% of cash flows are long-term contracted with over 90% investment-grade off-takers, and 35% is regulated under a fixed return-on-investment regime in Spain. TERPO's long-term contracts have a 12-year average remaining life, shorter than peers.

Privatization Largely Credit Supportive: TERP was taken private by Brookfield Renewable Partners and Brookfield affiliates in July 2020. TerraForm Power NY Holdings, Inc. (TERP NY) is the successor of TERP. The transaction removed administrative costs associated with a publicly listed company, approximately $4 million per year, and TERP NY will no longer pay management fees to Brookfield of approximately $27 million in 2019.

This arrangement also eliminates the need to meet the 5%-8% dividend growth target and 80%-85% dividend payout ratio and allows management to focus on organic growth and improving project performance in the future. However, private ownership usually will lead to less transparency on financial and operational data, a credit concern. The sponsor credit line provided by Brookfield Asset Management Inc. (A-/Stable) is terminated.

Organic and Low Growth: The privatization transaction has not led to meaningful change in TERPO's capital structure at this time. However, Fitch expects TERPO to shift toward an organic and low growth model from more aggressive growth through acquisitions. TERPO acquired Saeta Yield in 2018 and Alta Gas' distributed generation (DG) assets in 2019. Future growth will come from redevelopments (including repowering), expansions and improving asset availability. TERPO signed several contracts related to the repowering of the 160MW Cohocton and Steel Winds facilities in New York.

Fitch also expects TERPO to continue to evaluate accretive capital recycling activities. TERP closed on the sale of a 49.9% minority stake in an 836MW North American wind portfolio for net proceeds of approximately $250 million in October 2020. Proceeds from the sale were used to repay the revolver and finance the equity component of the NY Wind repower development costs.

Weak Asset Performance: TERPO's generation assets continue to perform below expectations due to resource and availability issues. TERPO experienced lower resource in the North America wind and solar segments and in Spain wind in 2020. Inverter issues on the Mt. Signal solar project led to lower availability, which Fitch understands will be resolved in early 2021. Merchant prices in Spain and Texas were weak in 2020.

In Spain, power prices are depressed due to lower demand and oversupply of renewable generation. Market revenue is estimated to comprise 25% of TERPO's regulated revenue in Spain and 8% of consolidated revenues. The return on investment adjustment partially mitigates the effects of low market prices.

However, the adjustment only takes place every three years. The next reset is expected to take place in December 2022. When wholesale market prices are outside a price band around the market price projected by the regulator during the preceding three years, the difference in revenues assuming average generation accumulates in a tracking account. The return on investment is then increased or decreased in order to amortize the balance of the tracking account over the regulatory life of the assets.

Service Contracts Mitigate Availability Issues: TERPO expects the wind operations and maintenance (O&M) to achieve approximately $20 million in run-rate savings following the implementation of the Full-Service Agreement (FSA) with General Electric Company (GE; BBB/Stable) on the North American wind fleet, except for one project.

TERPO has also executed Long-Term Service Agreements (LTSA) for European wind, which could achieve $4 million savings annually. TERPO signed a LTSA for its North America solar fleet, except for Arcadia, which could achieve $5 million savings. LTSA for Arcadia is currently under way.

Weak Credit Metrics: TERPO's 2019 HoldCo-only FFO leverage ratio exceeded the downgrade guideline ratio of 6.5x and Fitch expects the ratio in 2020 to continue to hover around 6.5x. We expect TERPO's credit metrics to improve to a level that is more consistent with the 'BB-' rating. In the next two years, Fitch projects that HoldCo-only FFO leverage will average approximately 6x, considering savings from the privatization transaction, service contracts and moderate improvement of asset performance.

Derivation Summary

TERPO's ratings are assigned based on a deconsolidated approach. TERPO's subsidiaries are project subsidiaries that have been largely funded by nonrecourse debt. Fitch applies a similar approach to NextEra Energy Partners LP (NEP; BB+/Stable) and Atlantica Sustainable Infrastructure plc (AY; BB/Stable), both of which own and operate portfolios of nonrecourse projects.

TERPO is similar in terms of generation capacity to NEP but is larger than AY. TERPO's long-term contracted fleet has a remaining contract life of 12 years, lower than NEP's 15 years and AY's 17 years. NEP and AY are publicly-traded yieldcos and are targeting 12%-15% and 8%-10% distribution growth, respectively. TERPO has been taken private and is no longer subject to public growth targets.

AY's renewable portfolio benefits from a large proportion of solar generation assets (63%) that exhibit less resource variability, versus NEP's 14% and TERPO's 43%. Fitch considers NEP better positioned than TERPO owing to NEP's primary presence in the U.S., stronger credit metrics and its association with NextEra Energy Inc. (A-/Stable). Similar to AY, TERPO is exposed to the Spanish regulatory framework. TERPO's credit metrics are weaker than those of AY but ownership by Brookfield is more favorable providing stability and expertise in executing business strategies.

Key Assumptions

Fitch's Key Assumptions Within Its Rating Case for the Issuer Include

- Wind O&M to achieve about $20 million in run-rate savings following the implementation of the FSA with GE that wraps O&M and major maintenance and guarantees production on a MWh basis;

- NY Wind repowering to be financed with retained cash flow;

- Moderate revenue growth assumed in 2021.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- HoldCo-only FFO leverage below 5.0x on a sustainable basis;

- A track record of a conservative and consistent approach in executing the business plan and managing growth from a credit perspective.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- HoldCo-only FFO leverage above 6.5x on a sustainable basis;

- Underperformance in project assets that lends material variability or shortfall to expected project distributions on a sustained basis and without a clear path to recovery;

- Growth strategy underpinned by aggressive acquisitions and/or addition of assets in the portfolio that bear material volumetric, commodity, counterparty or interest rate risks;

- Lack of access to funding that may lead TERPO to deviate from its target capital structure.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations

Unless otherwise disclosed in this section, the highest level of Environmental, Social and Corporate Governance (ESG) Credit Relevance is a Score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

TerraForm Power Operating, LLC; Long Term Issuer Default Rating; Affirmed; BB-; Rating Outlook Stable
----senior unsecured; Long Term Rating; Affirmed; BB

Contacts:
Primary Rating Analyst
Julie Jiang,
Director
+1 212 908 0708
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Rating Analyst
Kevin Beicke, CFA
Director
+1 212 908 0618

Committee Chairperson
Shalini Mahajan, CFA
Managing Director
+1 212 908 0351

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com

Additional information is available on www.fitchratings.com
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Additional Disclosures For Unsolicited Credit Ratings
Endorsement Status
Endorsement Policy

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT DETAILS FITCH’S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE.

Copyright © 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001
Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.