CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms East Coast Power LLC's (ECP) $318 million ($133.8 million outstanding) senior secured notes due June 2017 at 'BBB+'. The Rating Outlook is Stable.
KEY RATING DRIVERS
--Stable Contractual Revenues: ECP's cash flows are primarily derived from two PPAs for the majority of capacity, power, and steam output. The PPAs limit the project's exposure to dispatch and energy price risks, while the Consolidated Edison (ConEd) PPA availability credit provision helps minimize the revenue impact from forced outages. However, the PPA terms expose ECP to up to three months of tail risk. Fitch believes tail risk is mitigated by the six-month debt service reserve and potential renewal of the ConEd PPA or sale of capacity and energy in the merchant market given the competitive, efficient operating profile of the project. During the PPA period, Fitch estimates that ECP will earn approximately 5% of its revenues from merchant sales.
Revenue Risk: Midrange
--Strong Operating Profile: The project utilizes conventional and proven cogeneration technology. ECP is operated by an affiliate of the sponsor and equipment manufacturer with a financial and reputational incentive to properly manage the project. This is evidenced by strong historical availability factors and heat rates, as well as ECP's prompt recovery from the operational impacts of Hurricane Sandy. The project's PPAs provide for the recovery of substantially all fuel and O&M costs. Fitch notes that ECP does not maintain O&M and major maintenance reserves increasing the importance of operational stability and efficiency. Further, Fitch recognizes the PPAs contain favorable environmental cost pass-through provisions.
Operating Risk: Midrange
--Minimal Supply Risk: ECP procures its natural gas requirements under long-term agreements with an investment-grade counterparty mitigating volumetric risk. Price risk is minimized by the tolling-style PPAs, subject to heat rates and ConEd's weighted average cost of gas (WACOG) at Linden Venture. Fitch understands the gas supply contracts expire two months prior to debt maturity, but believes the competitive and highly liquid nature of the natural gas market reduces supply risk.
Supply Risk: Stronger
--Conventional Debt Structure: The fixed-rate, fully amortizing debt structure and provisions that limit additional debt and equity distributions are typical of similarly rated thermal power projects.
Debt Structure: Midrange
--Investment-grade Financial Metrics: ECP's cash flow available for debt service has generally outperformed the project's original base case projections, resulting in considerably higher debt service coverage ratios (DSCRs). Fitch rating case DSCRs based on low gas prices, as well as operational stresses, suggest average and minimum coverage of nearly 3x and above 2x in the final year of the debt term, respectively. Fitch recognizes that ECP's low outstanding leverage of 1x net debt-to-cash flow available for debt service and declining debt service profile provide considerable financial flexibility.
RATING SENSITIVITIES
--Operational Challenges: Prolonged decrease in project availability, persistent heat rate excursions, negative WACOG spreads, or an increased non-fuel cost profile that materially reduces Fitch rating case DSCRs could weaken ECP's credit quality.
--Issuance of Additional Debt: The issuance of additional debt that results in a significantly different DSCR profile may lead to a downgrade.
--Off-taker Rating Action: A change in ConEd's credit rating to a level below ECP's rating will result in a negative rating action.
SECURITY
Bondholders are secured by a pledge of equity interests in the general and limited partnerships that hold the Linden facilities and ECP's equity ownership. Fitch notes that cash distributions from the Linden facilities to ECP are structurally subordinated to project-level debt service. Currently, there is no project-level debt outstanding or expected during the debt term.
CREDIT SUMMARY
On Oct. 29, 2012, the project declared force majeure under all significant contracts due to the effects of Hurricane Sandy. Linden 6 was fully restored in November 2012, as indicated in the Fitch December 2012 NRAC titled 'Storm Damage to East Coast Power, LLC Adequately Mitigated'. Meanwhile, Linden Venture was partially restored to approximately 300MW (vs. 776MW nameplate capacity) in December 2012 and became fully operational in April 2013.
Management indicated approximately $50 million in repair costs were incurred, consistent with its initial estimates, due to Hurricane Sandy. All repair costs beyond the insurance deductible, which was funded with available working capital, are expected to be reimbursed. Management indicated that the insurer has been involved throughout the repair process and views reimbursement as a timing issue. The insurance deductible and repair invoices have been funded with working capital to-date. Fitch believes management's response in the aftermath of Hurricane Sandy was efficient and, in conjunction with its favorable PPA provisions and insurance policy, helped reduce the financial impact.
Additionally, as initially anticipated by Fitch, there was minimal revenue impact from Hurricane Sandy. This is due to the accumulation of considerable PPA availability credits that allowed ECP to earn capacity and energy payments under a force majeure event, in addition to business interruption proceeds. The project's Fitch-calculated 2012 DSCR of 2.60x was above the Fitch base case estimate. Going forward, the Fitch base case suggests that DSCRs will remain above 3.2x between 2013 and 2016 mainly due to the declining debt service profile.
ECP owns interests in two gas-fired cogeneration facilities in Linden, New Jersey. Linden Venture sells up to 645 megawatts of capacity and energy to Consolidated Edison Company of New York, Inc. (IDR rated 'BBB+' with a Stable Outlook by Fitch) under a PPA expiring in May 2017 with two five-year renewals. The project also supplies steam to a Phillips 66 (P66) affiliate refinery and Infineum USA petrochemical facility. Linden 6 provides steam to Linden Venture and up to 85 megawatts of electricity to the P66 affiliate refinery under a PPA expiring April 2017. Fitch notes the Linden 6 PPA was assigned to P66 prior to the separation of ConocoPhillips' upstream and downstream businesses in April 2012. General Electric International, Inc. was retained under a fixed-fee, long-term contract expiring May 2017 to operate, maintain and provide scheduled maintenance and inspections of the project facilities.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 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=799687
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