TEXT-S&P rates Astoria Generating Co. Acquisition LLC
(The following statement was released by the rating agency)
-- Astoria Gen is refinancing its existing first- and second-lien credit facilities due February 2013 and August 2013 respectively, with a new $450 first-lien credit facility consisting of a $425 million term loan and a $25 million revolving facility.
-- Following a review of U.S. electricity generator Astoria Gen's proposed refinancing documentation, we are applying our corporate criteria to the analysis of this company rather than our project finance criteria.
-- We are assigning the company a preliminary B-/Positive/-- corporate credit rating. We are also assigning a preliminary 'B' issue rating on the proposed $450 million first-lien credit facility with a recovery rating of '2'.
-- We rate the company based on the consolidated credit profile of its parent, US Power Generating Co. (USPG). The rating reflects a "vulnerable" business position and "highly leveraged" financial position.
-- The positive outlook reflects our view that the company's cash flow will benefit from recent regulatory outcomes and our expectation that its credit metrics will likely improve if the locational capacity requirements (LCR) of 85.4% is accepted by the Federal Energy Regulatory Commission (FERC).
Rating Action On Oct. 11, 2012, Standard & Poor's Ratings Services assigned its preliminary 'B-' corporate credit rating to Astoria Generating Co. Acquisitions LLC (Astoria Gen). At the same time, we assigned a preliminary 'B' issue rating to the proposed $450 million first-lien credit facility consisting of a $425 million term loan due 2018 and a $25 million revolving facility due 2017 with a preliminary recovery rating of '2'. The '2' preliminary rating indicates a substantial recovery (70% to 90%) if a default occurs. The outlook is positive.
Astoria Gen is refinancing its existing first-lien and second-lien credit facilities, consisting of a $430 million ($99 million outstanding) term loan and a $60 million ($57 million drawn) working capital facility, both due February 2013, and $300 million ($300 million outstanding) term bank loan due August 2013, with a new $450 million first-lien credit facility consisting of a $425 million term loan due 2018 and a $25 million working capital facility due 2017. The parent, USPG, will make an equity contribution of $15 million and Astoria Gen will use about $53.5 million of its available cash to fund the transaction.
We rate Astoria Gen based on the consolidated credit profile of its parent, USPG. The rating on Astoria Gen reflects a "vulnerable" business risk profile and a "highly leveraged" financial risk profile. Astoria Gen's vulnerable business risk profile reflects its fundamental exposure to the New York Independent System Operator's (NYISO) merchant capacity market, which has uncertain regulatory regimes and changing rules (see "New York's Capacity Power Markets Face Even More Uncertainty, And Generators' Credit Quality May Fall", published Aug. 21, 2012 on RatingsDirect on the Global Credit Portal). The company's plants are in high-cost locations, resulting in a high fixed-cost base. The business risk profile also reflects that the assets are relatively old with high capital expenditure requirements to ensure continued reliable long-term operations and to meet regulatory requirements under an environmental consent order. Although the plants have been well operated and maintained, as reflected by forced outage rates that are lower than average forced outage rates of all in-city generation facilities, the plants also have a history of major outages, which has resulted in significant capital expenditures and reduced revenues. Insurance policies have offset some of these outage costs. During past year, Unit 40 had a forced outage due to a boiler tube rupture. Subsequently, management made the economic decision to mothball this unit. More recently, the fuel pier collapsed at the Gowanus site and the Narrows site experienced damage to a transformer resulting from a high voltage line electrical malfunction that is expected to result in capital expenditure of about $15 million. Offsetting these problems is the location of the assets in constrained pockets of the NYISO market, resulting in premium in capacity and energy revenues. Moreover, the plants represent a significant portion of New York City's capacity and regulatory support exists to ensure the system meets reliability in the critically sensitive New York City market.
The company relies significantly on capacity revenues (contributes 80%-85% of total net revenues) for repayment of debt and therefore, the predictability and stability of future capacity prices in New York Zone 'J' are critical to the ratings. Astoria Gen's credit profile was hurt significantly in the past year due to heightened regulatory uncertainty consisting of a lengthy demand curve reset process and unmitigated entry of Astoria Energy II (AEII, 550 megawatt (MW), a project unrelated to Astoria Gen) in July 2011 and Bayonne Energy Center (BEC, 512 MW) in June 2012. As a result of these unmitigated entries, capacity prices decreased significantly. For instance, the July 2011 capacity price decreased by half to $6 per kilowatt- (kW) month from about $12 per kW-month in June 2011. The management filed two complaints with FERC in June and July 2011 with respect to the improper application of buyer side mitigation rules. Astoria Gen's financial performance deteriorated substantially (as a result of low capacity prices) and tripped on its leverage covenant for the third quarter of 2011, which was subsequently cured. Moreover, Astoria Gen mothballed 567 MW of its capacity in unit 40 and unit 20 due to lower capacity prices.
FERC has recently released orders on the two complaints filed by Astoria Gen, which we view as positive developments from the company's credit perspective. The latest order on the July 2011 complaint mostly agrees with issues raised by Astoria Gen and favorably, both orders remove some uncertainty regarding future capacity prices and provides greater insights on how mitigation determinations will be made in the future. Based on our review of orders, we think and our base case scenario assumes that Astoria II and Hudson Transmission Partners (HTP, which is expected to begin operation in August 2013) are likely to be mitigated and BEC will continue to remain unmitigated. We expect the capacity prices to improve once the mitigation determination of AEII is finalized. However, at this time, Astoria Gen does not intend to restart mothballed units unless it believes NYISO Zone J capacity market dynamics supports their operations.
Astoria Gen has revised its operations and maintenance (O&M) and capital expenditure policy, which calls for significant reductions in discretionary capital expenditure resulting in savings of more than $70 million over the next five years. Burn and Roe has opined that this reduction will not materially affect the performance of the plant. However, we believe this poses some credit risk given age and recent operating performance of the plant. Therefore, we assume that only 50% of anticipated savings will be achieved under our base case scenario.
We view the company's financial profile as highly leveraged. Under Standard & Poor's base case scenario, we expect the company's leverage, as measured by the adjusted debt to EBITDA ratio, to remain high at about 8.6x in 2012 and 7x in 2013. The company's financial profile benefits from a 100% excess cash sweep mechanism that steps down to 75% and 50% if certain leverage conditions are met. If the company amortizes debt in line with our expectations, we expect credit metrics to improve substantially beginning in 2014 as leverage decreases rapidly to about 4.6x in 2014 and then to 3.4x in 2015 under our base case scenario due to the 100% cash flow sweep mechanism. After the refinancing, initial leverage as measured on a dollar per kW basis, which is more meaningful, will be about $283 per kW, and will only decrease to about $256 per kW by 2014.
Our major base case assumptions are as follows:
-- 2012 NYISO Gold Book load estimates adjusted downward based on the 2012 actual weather-adjusted load;
-- Demand curve growth rate beginning the next reset period (2014-2015) at 2%;
-- LCR of 83%;
-- AEII and HTP assumed to be mitigated while BEC remains unmitigated;
-- Higher demand response participation compared to management case; and
-- Only 50% of anticipated savings in O&M and capital expenditure will be achieved.
We have also considered an alternative base case scenario that assumes LCR of 85.4% instead of the currently effective 83%. This assumption is based on New York State Reliability Council's (NYSRC) recent analysis and the market consultant, Charles River Associates' expectation that NYSRC will recommend an increase in LCR for New York City to 85.4% from 83%. If these values are approved, they represent significant upside potential as capacity prices would rise significantly. Under such a scenario, adjusted debt to EBITDA will be 4.5x for 2013 and below 3.5x for 2014. Adjusted funds from operations (FFO) to debt will be 12% in 2013 and above 18% for 2014, producing credit metrics in "aggressive" category.
Astoria Gen, a subsidiary of USPowerGen, owns three separate sites with generating assets--Astoria, a 1,333 MW natural gas/fuel oil-fired plant in Queens, N.Y., and the Gowanus and Narrows sites (847 MW), two barge-mounted facilities in Brooklyn, N.Y using combustion turbines, largely for peaking capacity. In April 2012, Astoria gen mothballed its Astoria unit 20 and unit 40, aggregating 567 MW. All three sites have "black-start" capability, the process of putting a power plant back into operation without relying on the external power transmission network. The plants all operate on a fully merchant basis and sell capacity and energy into NYISO's constrained zone J area.
Equity ownership of USPowerGen is divided between the former owners of EBG Holdings(Class A shares, 54%)--and Astoria Gen's owners--primarily Madison Dearborn Partners L.P., an affiliate of Hunt Oil Co., and USPowerGen management investors-(Class B Shares, 46%). There has been trading in Class A shares since the 2007 merger. Apart from the Astoria Gen units discussed above, USPG also owns interest in two development projects, South Pier Improvement Project (100 MW) and Luyster Creek Energy Project (400 MW).
After the refinancing, Astoria Gen's liquidity will consist of a $25 million revolving credit facility and about $70 million of cash on the balance sheet, including six months' debt service reserve. Moreover, the parent will have about $5 million in cash.
We characterize Astoria Gen's liquidity as less than adequate, reflecting:
-- Sources exceeding uses over the next 24 months above 2.0x due to no mandatory debt amortization requirement; Sources less uses are positive even with a 15% decrease in cash flow;
-- Narrow headroom under the leverage covenant pertaining to the revolver under our base case scenario; and
-- Sound relationships with banks.
Recovery analysis A default by the company with its current debt structure would require a substantial reduction in the net revenue that is anticipated in our base case assumptions. Key assumptions in our simulated default scenario, which contemplates a default in 2014, included:
-- Lower capacity revenues due to a combination of lower load on account of continued recessionary conditions, higher demand response participation, and a lower LCR value. More specifically, our scenario assumes capacity prices would decrease by an average of 33% through 2014 compared to our base case scenario;
-- Energy margins decrease by 25% from management base case;
-- Only half of the anticipated savings in O&M costs are realized;
-- Entire cash balance including debt service reserve is exhausted and revolving credit facility is assumed to be fully drawn.
Our analysis assumes Astoria Gen continues to operate as a reorganized entity following a default. We base our recovery expectations on similar cash flow assumptions (used in simulated default scenario above) using the discounted cash flow method and assuming useful asset life of 16 years through 2030. Using a 12% discount rate, we arrived at a gross enterprise value of $367 million. After deducting estimated administrative costs of 3%, the net enterprise value available to creditors is $356 million. Under our default scenario, we estimate that at the time of default, the total outstanding debt (including six month's prepetition debt service and drawn revolving credit facility) would consist of about $456 million. The resulting recovery rating is a '2', indicating substantial recovery (70% to 90%) if a default occurs.
The positive outlook reflects our view that the company's cash flow will benefit from recent regulatory outcomes and our expectation that its credit metrics will likely improve if FERC approves the LCR of 85.4%. Under such a scenario, we expect that the adjusted debt to EBITDA will improve to 4.5x for 2013 and below 3.5x for 2014. Adjusted FFO to debt will be 12% in 2013 and above 18% for 2014, producing credit metrics in the "aggressive" category. Moreover, management will need to achieve at least half of the anticipated costs savings in order to produce credit metrics in line with our expectation. We could revise the outlook to stable if the LCR is approved at the current 83%. We may lower the rating if liquidity weakens due to lower capacity prices, higher-than-expected O&M expenses, or poor operating performance.
Related Criteria And Research
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Standard & Poor's Standardizes Liquidity Descriptors for Global Corporate Issuers, July 2, 2010
Ratings List New Ratings
Astoria Generating Co. Acquisitions LLC
Corporate Credit Rating B-(prelim.)/Positive/-- $425 mil term loan due 2018 B(prelim.) Recovery Rating 2(prelim.) $25 mil revolver due 2017 B(prelim.) Recovery Rating 2(prelim.)
(Caryn Trokie, New York Ratings Unit)