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Rating Action:

Moody's affirms B1 on Star West Generation's credit facilities; outlook revised to negative

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.

RATINGS RATIONALE

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 amortization.

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.

REGULATORY DISCLOSURES

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 review.

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 the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Charles Berckmann
Asst Vice President - Analyst
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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