On September 6, 2019, Kroll Bond Rating Agency (KBRA) assigned a A- rating to the 3.67% Senior Secured Notes Due 2034 (the Notes) issued by Wind Energy Transmission Texas, LLC (WETT) for an original principal amount of $490 million.
The A- rating on the Notes reflects our view of the Projects strengths, as follows:
- Supportive Regulatory Environment: Transmission and distribution utilities under the jurisdiction of the PUCT in ERCOT benefit from the timely recovery of incurred investments and expenses, allowing for stable and predictable cash flows.
- Barriers to Entry for Competitors: Texas is well ahead of the 2025 target installed renewable capacity of 10,000 MW; there is currently approximately 21,000 MW of wind in the system and interconnect requests are high. While this is the case, there is a lengthy and rigorous process to be approved to develop a transmission system despite a need for more installed transmission capacity.
- Low Business Risk: WETT is a transmission-only utility which limits the business and operating risk of the project. WETTs budgeted operations and maintenance expenses are similar to those of other transmission assets; there is minimal maintenance capital expenditures expected during the life of the Notes. WETT has been able to successfully operate the project without any material unplanned outages or disruptions since achieving COD.
- Proven Technology: The technology used in both the transmission lines and in the substations is well-known and proven. Given the age of the assets, there is low operating risk and the maintenance expenditures in the near term are not significant.
The rating also reflects the projects following weaknesses:
- Allowable Return on Equity (ROE): The allowed ROE for WETT is 9.6%. The PUCT can order utilities considered to be earning above their allowed return to file a full rate case that could result in a reduction in the revenue requirement. While this is a risk, in the past, the PUCT has demonstrated that several factors are taken into account including the earnings trend over a number of years to determine if a rate review is necessary.
- Refinancing Risk: Under the KBRA rating case, the project will have approximately $428.4 million of debt outstanding at maturity in December of 2034. KBRA believes that refinancing risk is manageable given the enterprise value of future cash flows of $579.9 million (at a 10% discount rate) in the rating case at the maturity date.
The Stable Outlook reflects KBRAs view that the strong regulatory framework in ERCOT will continue to support the projects low business risk profile. KBRA expects that WETT will continue to successfully operate and maintain the project.
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The rating is based on KBRAs Global Project Finance Rating Methodology, published November 28, 2017.
Related Publications: (available at www.kbra.com)
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KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
Adeeti Amin, Associate Director
Maria de Urquijo, Associate Director