(The following statement was released by the rating agency)
-- Astoria Gen is refinancing its existing first- and second-lien creditfacilities due February 2013 and August 2013 respectively, with a new $450first-lien credit facility consisting of a $425 million term loan and a $25million revolving facility.
-- Following a review of U.S. electricity generator Astoria Gen'sproposed refinancing documentation, we are applying our corporate criteria tothe analysis of this company rather than our project finance criteria.
-- We are assigning the company a preliminary B-/Positive/-- corporatecredit rating. We are also assigning a preliminary 'B' issue rating on theproposed $450 million first-lien credit facility with a recovery rating of '2'.
-- We rate the company based on the consolidated credit profile of itsparent, 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 flowwill benefit from recent regulatory outcomes and our expectation that itscredit metrics will likely improve if the locational capacity requirements(LCR) of 85.4% is accepted by the Federal Energy Regulatory Commission (FERC).
Rating ActionOn 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 tothe proposed $450 million first-lien credit facility consisting of a $425million term loan due 2018 and a $25 million revolving facility due 2017 witha preliminary recovery rating of '2'. The '2' preliminary rating indicates asubstantial recovery (70% to 90%) if a default occurs. The outlook is positive.
Astoria Gen is refinancing its existing first-lien and second-lien creditfacilities, consisting of a $430 million ($99 million outstanding) term loanand a $60 million ($57 million drawn) working capital facility, both dueFebruary 2013, and $300 million ($300 million outstanding) term bank loan dueAugust 2013, with a new $450 million first-lien credit facility consisting ofa $425 million term loan due 2018 and a $25 million working capital facilitydue 2017. The parent, USPG, will make an equity contribution of $15 millionand Astoria Gen will use about $53.5 million of its available cash to fund thetransaction.
We rate Astoria Gen based on the consolidated credit profile of its parent,USPG. The rating on Astoria Gen reflects a "vulnerable" business risk profileand a "highly leveraged" financial risk profile. Astoria Gen's vulnerablebusiness risk profile reflects its fundamental exposure to the New YorkIndependent System Operator's (NYISO) merchant capacity market, which hasuncertain regulatory regimes and changing rules (see "New York's CapacityPower Markets Face Even More Uncertainty, And Generators' Credit Quality MayFall", published Aug. 21, 2012 on RatingsDirect on the Global Credit Portal).The company's plants are in high-cost locations, resulting in a highfixed-cost base. The business risk profile also reflects that the assets arerelatively old with high capital expenditure requirements to ensure continuedreliable long-term operations and to meet regulatory requirements under anenvironmental consent order. Although the plants have been well operated andmaintained, as reflected by forced outage rates that are lower than averageforced outage rates of all in-city generation facilities, the plants also havea history of major outages, which has resulted in significant capitalexpenditures and reduced revenues. Insurance policies have offset some ofthese outage costs. During past year, Unit 40 had a forced outage due to aboiler tube rupture. Subsequently, management made the economic decision tomothball this unit. More recently, the fuel pier collapsed at the Gowanus siteand the Narrows site experienced damage to a transformer resulting from a highvoltage line electrical malfunction that is expected to result in capitalexpenditure of about $15 million. Offsetting these problems is the location ofthe assets in constrained pockets of the NYISO market, resulting in premium incapacity and energy revenues. Moreover, the plants represent a significantportion of New York City's capacity and regulatory support exists to ensurethe system meets reliability in the critically sensitive New York City market.
The company relies significantly on capacity revenues (contributes 80%-85% oftotal net revenues) for repayment of debt and therefore, the predictabilityand stability of future capacity prices in New York Zone 'J' are critical tothe ratings. Astoria Gen's credit profile was hurt significantly in the pastyear due to heightened regulatory uncertainty consisting of a lengthy demandcurve reset process and unmitigated entry of Astoria Energy II (AEII, 550megawatt (MW), a project unrelated to Astoria Gen) in July 2011 and BayonneEnergy Center (BEC, 512 MW) in June 2012. As a result of these unmitigatedentries, capacity prices decreased significantly. For instance, the July 2011capacity price decreased by half to $6 per kilowatt- (kW) month from about $12per kW-month in June 2011. The management filed two complaints with FERC inJune and July 2011 with respect to the improper application of buyer sidemitigation rules. Astoria Gen's financial performance deterioratedsubstantially (as a result of low capacity prices) and tripped on its leveragecovenant for the third quarter of 2011, which was subsequently cured.Moreover, Astoria Gen mothballed 567 MW of its capacity in unit 40 and unit 20due 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 raisedby Astoria Gen and favorably, both orders remove some uncertainty regardingfuture capacity prices and provides greater insights on how mitigationdeterminations will be made in the future. Based on our review of orders, wethink and our base case scenario assumes that Astoria II and HudsonTransmission Partners (HTP, which is expected to begin operation in August2013) are likely to be mitigated and BEC will continue to remain unmitigated.We expect the capacity prices to improve once the mitigation determination ofAEII is finalized. However, at this time, Astoria Gen does not intend torestart mothballed units unless it believes NYISO Zone J capacity marketdynamics supports their operations.
Astoria Gen has revised its operations and maintenance (O&M) and capitalexpenditure policy, which calls for significant reductions in discretionarycapital expenditure resulting in savings of more than $70 million over thenext five years. Burn and Roe has opined that this reduction will notmaterially affect the performance of the plant. However, we believe this posessome credit risk given age and recent operating performance of the plant.Therefore, we assume that only 50% of anticipated savings will be achievedunder 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 bythe adjusted debt to EBITDA ratio, to remain high at about 8.6x in 2012 and 7xin 2013. The company's financial profile benefits from a 100% excess cashsweep mechanism that steps down to 75% and 50% if certain leverage conditionsare met. If the company amortizes debt in line with our expectations, weexpect credit metrics to improve substantially beginning in 2014 as leveragedecreases rapidly to about 4.6x in 2014 and then to 3.4x in 2015 under ourbase case scenario due to the 100% cash flow sweep mechanism. After therefinancing, initial leverage as measured on a dollar per kW basis, which ismore 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 the2012 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 beachieved.
We have also considered an alternative base case scenario that assumes LCR of85.4% instead of the currently effective 83%. This assumption is based on NewYork State Reliability Council's (NYSRC) recent analysis and the marketconsultant, Charles River Associates' expectation that NYSRC will recommend anincrease in LCR for New York City to 85.4% from 83%. If these values areapproved, they represent significant upside potential as capacity prices wouldrise significantly. Under such a scenario, adjusted debt to EBITDA will be4.5x for 2013 and below 3.5x for 2014. Adjusted funds from operations (FFO) todebt 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 withgenerating assets--Astoria, a 1,333 MW natural gas/fuel oil-fired plant inQueens, N.Y., and the Gowanus and Narrows sites (847 MW), two barge-mountedfacilities in Brooklyn, N.Y using combustion turbines, largely for peakingcapacity. In April 2012, Astoria gen mothballed its Astoria unit 20 and unit40, aggregating 567 MW. All three sites have "black-start" capability, theprocess of putting a power plant back into operation without relying on theexternal power transmission network. The plants all operate on a fullymerchant basis and sell capacity and energy into NYISO's constrained zone Jarea.
Equity ownership of USPowerGen is divided between the former owners of EBGHoldings(Class A shares, 54%)--and Astoria Gen's owners--primarily MadisonDearborn Partners L.P., an affiliate of Hunt Oil Co., and USPowerGenmanagement investors-(Class B Shares, 46%). There has been trading in Class Ashares since the 2007 merger. Apart from the Astoria Gen units discussedabove, USPG also owns interest in two development projects, South PierImprovement Project (100 MW) and Luyster Creek Energy Project (400 MW).
After the refinancing, Astoria Gen's liquidity will consist of a $25 millionrevolving credit facility and about $70 million of cash on the balance sheet,including six months' debt service reserve. Moreover, the parent will haveabout $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 nomandatory debt amortization requirement; Sources less uses are positive evenwith a 15% decrease in cash flow;
-- Narrow headroom under the leverage covenant pertaining to the revolverunder our base case scenario; and
-- Sound relationships with banks.
Recovery analysisA default by the company with its current debt structure would require asubstantial reduction in the net revenue that is anticipated in our base caseassumptions. Key assumptions in our simulated default scenario, whichcontemplates a default in 2014, included:
-- Lower capacity revenues due to a combination of lower load on accountof continued recessionary conditions, higher demand response participation,and a lower LCR value. More specifically, our scenario assumes capacity priceswould decrease by an average of 33% through 2014 compared to our base casescenario;
-- 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 andrevolving credit facility is assumed to be fully drawn.
Our analysis assumes Astoria Gen continues to operate as a reorganized entityfollowing a default. We base our recovery expectations on similar cash flowassumptions (used in simulated default scenario above) using the discountedcash 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 $367million. After deducting estimated administrative costs of 3%, the netenterprise value available to creditors is $356 million. Under our defaultscenario, we estimate that at the time of default, the total outstanding debt(including six month's prepetition debt service and drawn revolving creditfacility) would consist of about $456 million. The resulting recovery ratingis a '2', indicating substantial recovery (70% to 90%) if a default occurs.
The positive outlook reflects our view that the company's cash flow willbenefit from recent regulatory outcomes and our expectation that its creditmetrics will likely improve if FERC approves the LCR of 85.4%. Under such ascenario, we expect that the adjusted debt to EBITDA will improve to 4.5x for2013 and below 3.5x for 2014. Adjusted FFO to debt will be 12% in 2013 andabove 18% for 2014, producing credit metrics in the "aggressive" category.Moreover, management will need to achieve at least half of the anticipatedcosts 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 current83%. We may lower the rating if liquidity weakens due to lower capacityprices, 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 GlobalCorporate Issuers, July 2, 2010
Ratings ListNew 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)