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Rating Action:

Moody's affirms Ba3 rating on Edgewater Generation L.L.C.'s senior secured credit facilities; outlook stable

18 Jan 2019

New York, January 18, 2019 -- Moody's Investors Service ("Moody's") affirmed the Ba3 rating assigned to Edgewater Generation L.L.C.'s senior secured credit facilities in light of its proposal to use the $100 million incremental borrowing allotment under its term loan facility to acquire a third power plant for the portfolio. Pro-forma for the acquisition, Edgewater Generation's senior secured credit facilities will consist of a $1.025 billion term loan due 2025, a $60 million revolving credit facility due 2023 and a $65 million standalone letter of credit facility due 2023.

The project will use loan proceeds, in combination with $55 million of equity from sponsor Starwood Energy Group, to acquire a 545MW peaking power plant located in Lorain, Ohio, from First Energy. The transaction requires regulatory approval and is expected to close in February 2019.

RATINGS RATIONALE

The Ba3 rating for Edgewater's secured credit facilities underscores our view that Fairless Energy Center remains the portfolio's anchor asset and primary cash flow contributor. We see the acquisition as complementary to Edgewater Generation's existing 2-asset portfolio, given that the addition of West Lorain increases the project's overall geographic, asset and cash flow diversity -- all credit positives. That said, Fairless, a 1,320MW baseload combined cycle gas turbine (CCGT) in PJM's EMAAC zone, contributes 70% of cash flows under Moody's base case model over the life of the debt. The West Lorain power plant asset is a seven unit 545MW peaker plant located in PJM's ATSI region. The portfolio's other asset is Manchester Street Station, a 512MW dual fuel oil/gas CCGT located in Rhode Island within ISO-NE's SENE region. Pro-forma for the acquisition, Moody's projects that West Lorain and Manchester will respectively contribute roughly 22% and 8% of the portfolio's cash flows.

The West Lorain plant produced annual EBITDA of around $15-18 million in recent years, primarily from capacity revenues. The plant has been running its two 1973-vintage dual-fuel units on fuel oil in simple cycle mode since 2013 after pressure disruptions on its existing gas pipeline (served by Columbia ATC) made operating on gas unfeasible. Starwood believes it can generate an additional $12 million in energy margins annually by relinking the plant's gas supply to the Nexus Gas Transmission pipeline and running its five 2001-vintage gas turbine units on natural gas. This requires building a 3-mile gas lateral to connect to the newly constructed Nexus pipeline. Our math indicates that the West Lorain plant generates sufficient capacity revenues operating on fuel oil to cover its debt service; hence we see this transaction as relatively credit neutral in the early years to moderately credit positive in the later years once incremental energy margins materialize.

The portfolio's projected credit metrics fall on the lower end of the Ba-rating category under Moody's base case scenario for the years 2020 and forward. We note that 2019 results include 24+ day outages for each of Fairless' 2 units for major maintenance and West Lorain production on fuel oil - both factors weigh on annual metrics. Our base case scenario assumes relatively flat capacity clearing prices, uses SNL forward prices for power and gas over the life of the debt and and gives no credit to several areas where Fairless and Manchester have potential to capture higher energy margins. For West Lorain, our base case assumes that the plant is successfully converted to gas and that ATSI clears with RTO in future capacity price auctions.

Anticipated leverage for the transaction is estimated around 5 times for the initial years of the debt. Estimated CFO/Debt improves slightly to 10-11% with the addition of West Lorain as well as some improvement in spark spreads at Fairless. Debt service coverage ratios (DSCR) are around 2x in initial years of the debt. Our projections anticipate weaker metrics in the 2023/24 timeframe as lower capacity price expectations plus about $60 million in planned maintenance reduce cash flows available for debt service over the 2 year period.

Rating Outlook

The outlook remains stable, based on our expectation for stable operating performance and credit metrics on the lower end of the Ba rating category, including debt-to-EBITDA around 5-6x, CFO/Debt around 10% and a DSCR around 2x.

What could change the rating up

A ratings upgrade could occur if capacity market reforms result in further increasing zonal premiums or if strong energy margins drive sustainable growth in cash flows, with CFO/Debt comfortably around 15% and a DSCR above 2x on a sustained basis.

What could change the rating down

A ratings downgrade could occur if cash flow generation fell short of expectations such that credit metrics deteriorated; including leverage above 6x, DSCR below 1.1x and CFO/Debt in the mid-single digits for an extended time period.

Methodology

The principal methodology used in these ratings was Power Generation Projects published in June 2018. 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.

Gayle Podurgiel
Asst Vice President - Analyst
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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