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Global Credit Research - 18 Nov 2016
Approximately $446 million in rated term debt outstanding
New York, November 18, 2016 -- Moody's Investors Service ("Moody's") affirmed Star West Generation,
LLC's (Star West) B1 rating on its senior secured credit facilities consisting
of $446 million in an outstanding senior secured term loan B due
March 2020 and a $100 million revolving credit facility due March
2020 (mostly undrawn). Concurrently, we revised Star West's
rating outlook to negative from stable based on weakening re-contracting
prospects owing to our assessment of challenging market developments in
the desert southwest electricity market region, best evidenced by
the terms of a recent asset sale of a similar-sized combined cycle
generating unit in the region.
Moody's outlook revision incorporates our assessment of recent developments
in the region where the Star West assets operate that have dimmed Star
West's re-contracting prospects. Specifically,
Calpine Corporation 's announced sale of its South Point Energy
Center (South Point) to NV Energy is a credit negative data point for
Star West as South Point is the approximate size and in close proximity
to the existing Griffith combined-cycle plant. Furthermore,
Nevada Power Company (NPC: Baa1 stable), an operating subsidiary
of NV Energy, is the current tolling off-taker for Griffith's
energy and capacity contract which expires in September 2017. While
the South Point transaction has not yet closed, the publicly disclosed
price point for the transaction is $76 million, or $142
per kilowatt (KW) indicating the challenging market dynamics for power
generation assets in the desert south west. If Griffith is unable
to re-contract a meaningful portion of its nameplate capacity at
its contract expiry date, we calculate that Griffith will likely
generate merchant energy margins net of variable operations and maintenance
(VOM) of around $15 million, compared to the contracted margins
currently earned of approximately $50 million.
The negative outlook also reflects market developments that could keep
market power prices across the region tempered negatively affecting the
profile for both Star West assets. Specifically, in October
2016, the investment grade off-taker for Arlington Valley,
joined California's Energy Imbalance Market which connects other
regional balancing area authorities and helps to smooth power prices through
the region, particularly by opening up bottlenecks and reducing
or substantially eliminating negative pricing in some regions.
Overall, the effect is likely to lead to lower merchant power prices
in the region. We believe that other states in the region will
join over time. If Griffith and Arlington Valley were to operate
on a fully merchant basis, which would occur by November 2019 absent
any re-contracting, Star West's ability to generate
sufficient cash flow to fully cover its operating costs and debt service
obligations would be challenged. That said, both plants continue
to earn capacity and energy payments through the existing tolling arrangements
in place and generate sufficient cash flow to cover debt service and make
modest voluntary debt reduction payments through at least 2019 based on
our calculations. Additionally, Star West remains in compliance
with their interest coverage covenant, currently set at 1.6x
and is expected to continue to do so as the test steps down over time.
The affirmation of Star West's B1 rating is driven by the reliable
cash flow stream currently generated through its summer-only tolls
on its Griffith and Arlington Valley assets through September 2017 and
October 2019, respectively. Positively, the predictability
of this cash flow has enabled the project to repay debt in line with what
was contemplated in the Moody's base case. By year-end
2016, we anticipate the project will be able to make a meaningful
optional debt reduction payment through its excess cash flow sweep provision
bringing year-end debt levels to below $435 million,
the level we anticipated. Merchant margins generated by both plants
remain largely negligible in the shoulder months, though in line
with what we anticipated, given the abundant surplus generation
in the region.
The assets continue to perform well operationally during the summer tolling
season availing the issuer to full receipt of capacity payments.
Barring operational issues, further optional debt reduction of $20
million through the cash sweep construct is likely during 2017.
Financial metrics are fully consistent with B-rated project financing
with funds from operations to debt (FFO/Debt) and debt service coverage
ratios of around 9% and 1.9x, respectively.
However these metrics do not incorporate the tail risk for this project
where financial performance could fall precipitously should the assets
operate solely on a fully merchant basis given the expectations for power
prices. Positively, the B1 rating also acknowledges the level
of borrowing capacity available to Star West under its $100 million
secured revolving credit facility, which provides interim funding
during the shoulder months of each year and will likely be utilized on
a more permanent basis should re-contracting efforts at Griffith
come up short.
The rating is unlikely to be upgraded given the negative outlook and absent
positive re-contracting developments in the next year, further
downward pressure is likely. Further negative rating action would
occur should Star West violates its interest coverage covenant,
currently set at 1.6x but with gradual step downs or should Star
West fail to adequately replenish revolver borrowings during the course
of the year. The rating could also be downgraded should operating
issues surface at either plant, particularly during the peak summer
months when both plant earn most of their revenue and cash flow.
The rating could be stabilized should sufficient capacity at either facility
be re-contracted for a duration and at price levels that would
enable meaningful debt reduction above and beyond the 1% mandatory
Star West owns the 570 MW Griffith and the 579 MW Arlington Valley natural
gas-fired, combined-cycle power generation projects
in Arizona. Arlington is contracted on a summer-basis only
through October 2019 with an investment grade utility while Griffith has
a summer-only tolling agreement through September 2017 with NPC.
The principal methodology used in these ratings was Power Generation Projects
published in December 2012. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Asst Vice President - Analyst
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Associate Managing Director
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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