CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB' rating on Kleen Energy Systems, LLC's (Kleen) $435 million ($308 million outstanding) term loan A due 2018 and $295 million ($279 million outstanding) term loan B due 2024. The Rating Outlook is Negative.
Key Rating Drivers
--Fixed price agreements: Kleen's revenues are initially derived from fixed-price tolling and capacity agreements with investment-grade counterparties, partially mitigating price risks through 2017. Once the tolling agreement expires, a scheduled step-down in debt service should moderate Kleen's energy price exposure during the merchant period. Capacity payments should provide additional revenue support over the long term. Revenue Risk: Midrange
--Lack of operational history: Kleen has not yet established a stable cost profile or demonstrated a pattern of consistent operating performance. Fitch anticipates that actual costs will exceed original projections by a wide margin, heightening the potential impact of operational underperformance going forward. Kleen must meet target availability and heat rate requirements to avoid contractual penalties and maximize revenues. Favorably, Kleen benefits from commercially proven, reliable technology operated and maintained by experienced O&M providers. Operation Risk: Weaker
--Minimal supply risk: The tolling agreement provides strong protection against fuel price risk through 2017, though the project is exposed to replacement power costs in the event of a forced outage. Kleen is exposed to margin risks during the merchant period but is not dependent on market-based revenues, as capacity payments alone should be sufficient to meet debt service requirements. Volumetric risks are minimal, as the project is situated in a highly liquid and competitive natural gas market. Supply Risk: Midrange
--Mitigated refinancing risk: Fitch believes it is likely that Kleen will fully prepay the term loan A balloon payment prior to maturity. The supplemental amortization mechanism relies upon contracted revenues during the tolling period, and catch-up provisions provide some protection against temporary interruptions in cash flow. Kleen's debt structure otherwise incorporates standard terms and conditions with adequate liquidity provisions. Debt Structure: Midrange
--Weakened financial profile: Fitch-projected debt service coverage ratios (DSCRs) range between 1.25x and 1.35x during the tolling period under a Fitch rating case that considers a combination of low availability, technical underperformance, and further increases to a deteriorating cost profile. The rating is not constrained by financial performance during the merchant period, primarily due to declining debt service relative to higher projected revenues.
Rating Sensitivities
--Cost stability: Consistent demonstration of a stable cost profile would be consistent with the rating, while further increases in costs would heighten the project's vulnerability to operating event risks.
--Operating performance shortfall: Persistently low availability or an accelerated degradation in heat rates would reduce revenue and potentially subject the project to contractual penalties.
--Inability to refinance: In the event that an outstanding balance remains on the term loan A at maturity, market conditions and/or project-specific factors could prevent Kleen from refinancing.
Security
The collateral includes a first-priority security interest in the ownership interests in Kleen, all real and personal property, including Kleen's rights under the project documents, the project accounts, and all revenues.
Credit Update
Kleen's recent financial performance generally met Fitch's revised base case projections, which incorporate a combination of lower revenues and higher O&M costs that exceed the sponsor's original projections by an estimated 50% to 60%. Fitch estimates Kleen's DSCR at 1.41x for 2012, exceeding Fitch's 1.35x forecast by a small margin. Kleen has generated sufficient excess cash flow to pay cumulative supplemental amortization payments of $28.5 million on the term loan A, as originally projected.
The Negative Outlook reflects the potential for additional volatility in Kleen's cost structure as the project continues its effort to establish a stable operating profile. Fitch will reassess the stability of the project's cost structure once Kleen completes another full year of operations. Regional Greenhouse Gas Initiative expenses in 2013 may exceed the cost incurred in 2012, as allowance prices have risen to more than twice the floor price. The Connecticut Gross Receipts Tax may increase as well, depending upon the price of natural gas and the level of dispatch.
Kleen's operational metrics are consistent with original projections, and both availability and heat rates have generally exceeded contractual thresholds. The capacity factor averaged 75% and Kleen achieved availability of 98.64% in 2012. Year-to-date availability through May 2013 fell to 91.5% due to a week-long forced outage in January after the facility experienced fuel oil leaks. The issue was permanently resolved at the expense of Siemens, which performs major maintenance under a long-term services agreement.
Kleen incurred approximately $4 million of market-based replacement power charges as a result of the forced outage. Fitch estimates that the outage will have a negative impact of 0.05x on the 2013 DSCR. Revenues otherwise remain subject to the capacity price dispute with Connecticut Light and Power (Fitch IDR 'BBB+' with a Stable Outlook) and variability in nodal pricing differentials under the tolling agreement.
Kleen is a special-purpose company created to own and operate the project, which consists of a 620-megawatt combined-cycle electric generating facility located near Middletown, CT. Kleen sells capacity under a 15-year agreement with CL&P. Exelon Generation Company (ExGen, Fitch IDR 'BBB+' with a Stable Outlook) purchases the facility's energy output under a seven-year tolling agreement. Exelon Corp. Fitch IDR 'BBB+' with a Stable Outlook), ExGen's parent, has partially guaranteed ExGen's contractual obligations.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' July 12, 2012;
--'Rating Criteria for Thermal Power Projects' June 17, 2013.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Thermal Power Projects
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710786
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=796266
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