MOODY'S ASSIGNS Baa3 RATING TO JUNIPER GENERATION'S PROPOSED ISSUE OF SENIOR SECURED NOTES
Approximately $203.5 Million of Debt Securities Affected.
New York, December 06, 2004 -- Moody's Investors Service has assigned a Baa3 rating to approximately
$203.5 million of senior secured notes due 2014 to be issued
by Juniper Generation, L.L.C. (Juniper).
The rating outlook is stable.
Proceeds from the offering, along with the planned issuance of about
$67.5 million in unrated senior subordinated notes,
will be used to repay approximately $96 million of principal outstanding
on the 8.96% senior secured notes due 2012 issued by Juniper
(rated Ba1); to prepay the approximate $70 million of bank
debt outstanding on certain wholly-owned subsidiaries of Juniper;
to fund a subordinated debt service reserve; to pay closing costs
associated with the transaction, including make whole amounts due
on the existing Juniper notes and swap breakage on the project bank debt;
and to make distributions to Juniper's owners on or immediately
following the closing.
The Juniper Baa3 rating considers the following factors:
1. The high degree of cash flow predictability, as 100%
of the expected cash flow for electricity sales will be provided by two
California investor-owned load serving utilities, Pacific
Gas and Electric Company (PacGas: Baa3 senior unsecured) and Southern
California Edison Company (SCE: Baa1 senior unsecured) under long-term
purchase power agreements (PPA);
2. About 20% of electric consumption in California is provided
by Qualifying Facilities (QFs), such as the projects owned by Juniper,
representing a core component of California's electric supply;
3. While energy pricing risk exists after July 2006 as the energy
compensation for QFs reverts to the utility's short-run avoided
cost (SRAC), Juniper is competitively positioned relative to other
higher heat rate QFs in California to reasonably manage this risk;
4. While Juniper is a holding company, structural subordination
has been mitigated as virtually all of the debt (except for $11.6
million that matures in June 2006) will be at the Juniper level and there
will be a prohibition on additional subsidiary debt;
5. The Juniper projects have been operating between nine to sixteen
years and have historically demonstrated strong availability factors,
capacity factors, and consistent cash flows;
6. Debt amortization is front-end loaded, thereby
improving the project's financial profile in the last few years
of this ten year financing when the SRAC related risk may be higher;
7. While off-taker concentration risk exists, these
nine projects enjoy a portfolio benefit from an operational standpoint,
particularly before 2009, as no one project is expected to contribute
more than 15% of Juniper's overall cash flow;
8. The Bakerfield projects, which represent eight of the
nine Juniper projects and 94% of the portfolio's generating
capacity, are directly connected to major interstate and intrastate
pipelines resulting in fuel cost savings of about $0.20-0.30/MMBtu
for these projects relative to some other QFs;
9. The independent engineer has opined favorably on operational
and environmental matters;
10. Continuity of the existing staff at the plants and the track
record of Delta Power reduces operational risk.
These factors are balanced against the following risks:
1. Potential for energy margin compression due to the uncertainty
surrounding the California Public Utilities Commission's (CPUC) determination
of SRAC;
2. California regulatory decisions surrounding SRAC are likely
to be highly contentious;
3. The transaction results in an increase in consolidated leverage
as total consolidated debt, including subordinated debt, will
increase by around $100 million;
4. Collateral package, while enhanced from the current deal,
is somewhat weakened by the fact that Juniper has a controlling interest
in four of the nine facilities;
5. Seven of the nine PPAs expire prior to the full repayment of
the notes, although cash flows from the remaining two projects are
sufficient to comfortably repay the debt at maturity;
6. While the debt has been sized to produce higher than normal
base case coverages for an investment grade project, cash flow volatility
could occur depending upon the outcome of the SRAC proceedings;
7. Each of the facilities must maintain its QF status in order
for the PPA's to remain intact. Three of the steam hosts have the
ability to unilaterally terminate their steam contract before the expiration
of their respective PPA.
The Baa3 rating reflects the predictable source of cash flow expected
to be generated from energy and capacity payments received from nine separate
PPAs with investment grade off-takers, PacGas and SCE.
The rating also considers the importance of these QF assets to the current
and future power supply in California. QFs currently provide more
than 20% of the electricity generated in California, a region
that has relatively tight in-state electric supply and relies heavily
on out-of-state imports, including the availability
of hydro capacity in the Pacific Northwest. In light of the relatively
tight electric supply in the state, the challenges that companies
face in building in-state generation and transmission, the
year-to-year volatility associated with the region's reliance
on hydro resources, and the expectation for higher than normal demand
growth, Moody's believes that the QFs will remain an integral
part of the state's electric supply over the life of this financing.
The Baa3 rating also incorporates that structural subordination related
risks will be mitigated following the completion of this financing as
virtually all of the debt issued at the underlying projects have been
or will be paid off from the proceeds of this financing. Of the
nine projects wholly-owned or partially owned by Juniper,
only $11.6 million of debt at the Badger Creek project,
owned 50% by Juniper, will remain outstanding, and
such debt benefits from a project-level debt service reserve of
$3.0 million and is scheduled to be repaid in June 2006.
While the indenture gives Juniper limited ability to add project level
debt, principally for mandated capital expenditures, the rating
incorporates an expectation that there will not be a significant increase
in project level debt. The rating considers the strong and predictable
historical operating and financial performance of these projects,
the highly tested and proven technology of this fleet, and the track
record of Delta Power, the operator. The rating further considers
the operational diversity of generating cash flows from nine different
plants balanced against the concentrated counterparty and regulatory risk
that exists at Juniper. Bondholders benefit from the front-end
nature of the amortization schedule which strengthens the project's
profile in the later years when the PPA's of various Juniper plants begin
to expire.
The Baa3 rating considers the potential for energy margin compression
beginning after July 2006 that could follow the CPUC's determination of
SRAC. Like many QFs in the state, Juniper's plants
currently receive a fixed energy payment under a transitional arrangement
that expires in mid-2006. Further, Juniper has locked
in a stable energy margin by entering into various natural gas hedges.
Moody's expects the SRAC process to be contentious with the utilities
seeking to lower the compensation paid for energy under these contracts
to the lowest possible level and the QFs seeking to have an energy price
mechanism that minimizes any margin compression. An overriding
theme that should benefit the QFs position is the importance of these
assets to the overall resource supply mix in California given the relatively
tight regional supply and the challenges to build additional energy infrastructure
in the state. Notwithstanding this core strength, Moody's
believes that the compensation scheme that ultimately results from the
SRAC negotiations will likely be set at a level that is lower than the
current energy margin enjoyed by Juniper, and that QFs owners will
likely see their energy margins gradually compress over time as more efficient
generating units are brought on-line in the region. Moody's
believes that the debt has been sized and the amortization has been shaped
to reflect this uncertainty as base case debt service coverage ratios
of senior debt average 1.68 times after 2006.
The Baa3 rating also considers the higher leverage that will exist at
Juniper following the financing. In addition to the senior debt
being offered, Juniper will issue approximately $67.5
million of subordinated debt. Moody's views the subordinated
debt as deeply subordinated to the senior debt as holders of the subordinated
notes have no rights against Juniper or its subsidiaries if an event of
default were to occur on the subordinated notes, so long as there
is any senior debt outstanding. Additionally, the payments
of interest and principal on subordinated debt are subject to the same
restricted payments test of 1.20x as distribution payments to equity.
Moody's notes that while the collateral package is enhanced from the current
deal, as it now includes the assets of the four wholly-owned
projects, it does not include the assets of the five partially owned
projects. Moreover, the project structure allows the release
of individual projects from the collateral pool upon the expiration of
the existing PPAs, which could lower the value of the collateral
for bondholders in a distressed scenario. Mitigating this risk
is the fact that contracted cash flows from wholly-owned projects
are part of the collateral package through the term of the financing and
the amortization schedule is sized to produce debt service coverage ratios
in the base case of at least 1.68x in each of the last few years
of the transaction.
Juniper's senior debt is secured by a first lien interest on all
of the assets of the wholly-owned facilities, including the
off-take PPA's and the companion contracts with the steam hosts.
Each of the wholly-owned facilities will provide a joint and several
guarantee of Juniper's debt. The senior debt is also secured by
the stock of Juniper's interest in each of the wholly-owned
subsidiaries and its equity/ownership interest in each of the partially
owned subsidiaries. The transaction will feature the standard waterfall
structure for payment obligations and will have a six-month debt
service reserve for senior debt that will initially be provided by the
project in the form of a letter of credit. Interest payments for
draws under the letter of credit reimbursement agreement will be paid
on par with senior debt service while principal payments of the letter
of credit reimbursement agreement will be paid after payment of senior
debt service in the waterfall.
The rating outlook is stable reflecting the predictability of cash flows
anticipated from the projects, particularly over the next two years,
as the projects have largely locked in their energy margin with the utilities
under the transition formula. Limited rating upside potential exists
given the uncertainty surrounding the outcome of SRAC and the high degree
of leverage that exists at Juniper. However, over the longer
term, the rating of Juniper could be upgraded if the issuer were
able to demonstrate sustainable coverages that are significantly higher
than projected in its base case and there is reduced uncertainty about
the potential for lower pricing under SRAC. The rating of Juniper
could be lowered if substantial debt were to be issued at the project
level causing the Juniper debt to become structurally subordinated,
if the outcome of SRAC severely compresses Juniper's energy margin,
if the operating performance of more than one of Juniper's projects substantially
deteriorates, or if one of the Juniper projects were to lose its
QF status.
The Baa3 rating is predicated upon Moody's satisfaction with final documentation
and debt sizing to meet projected base case debt service coverage ratios.
Juniper is a holding company for nine gas-fired cogeneration projects
in California with a net equity interest of 298 MWs, a related O&M
service company, WCAC Operating Company California L.L.C.
(West Coast Operating) and a related fuel supply services company,
WCAC Gas Services, L.L.C. (West Coast Gas).
Through a number of intermediate holding companies, Juniper owns
100% of the equity interests in four of the facilities (total of
184MW of generating capacity), 50% interests in four of the
five remaining facilities (total of 95MW of net equity generating capacity)
and 40% of one facility (19MW of net equity generating capacity).
Juniper also has management control over eight of the nine facilities
and operational authority for all of the nine facilities. In addition,
Juniper owns 100% of the equity interests in West Coast Operating
and West Coast Gas.
Juniper was originally owned 51% by El Paso Corporation and 49%
by John Hancock. In several subsequent transactions during 2004,
ArcLight Energy Partners Fund II, a fund managed by ArcLight Capital
Partners, acquired 90% of the equity interests in Juniper
and the remaining 10% is held by Delta Power Company, LLC
(Delta Power).
New York
Daniel Gates
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
A.J. Sabatelle
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
