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Rating Action:

Moody's affirms Invenergy's Ba2 senior secured credit facilities; outlook revised to negative

23 Apr 2021

Approximately $436 million of credit facilities affected

New York, April 23, 2021 -- Moody's Investors Service, ("Moody's") today affirmed the Ba2 rating assigned to Invenergy Thermal Operating I LLC's ("Invenergy", "ITOI") senior secured credit facilities including the $366 million senior secured term loan B due August 2025 and a $70 million revolving credit facility due August 2023. The outlook is changed to negative from stable.

RATINGS RATIONALE

Today's rating action incorporates the continued uncertainty and ongoing dispute that remains between Ector County Energy Center (Ector), an ITOI owned Texas-based generating plant and a heat rate call option (HRCO) counterparty that arose following Winter Storm URI which could potentially result in substantial claims against Ector, which is part of the ITOI collateral package as well as the possible unforeseen consequences for ITOI. The rating affirmation recognizes efforts by ITOI to limit this potential Ector related exposure by seeking a waiver from the ITOI lenders that, among other things, prevents the occurrence of certain default provisions in the credit facilities should the HRCO counterparty pursue its financial settlement claim against Ector and terminate the HRCO. While the waiver if granted would limit the contagion risk of the Ector-related exposure to ITOI, it does not provide a specific resolution of the potential claim that the HRCO counterparty could assert against Ector but keeps the ITOI loan in good standing beyond the expiration of the standstill agreement (see below). We do note however that a bankruptcy filing or proceeding involving Ector is not included in the waiver as the ITOI lenders will continue to retain the ability to enforce their rights in the event of Ector's bankruptcy. Invenergy and the HRCO counterparty have signed a standstill agreement that expires on May 10, 2021.

As background, Winter Storm URI caused energy prices to reach the $9,000/MWh cap for 33 hours, while natural gas prices saw increases of more than 14,000%. Ector, a 330MW merchant power plant operating in the Electricity Reliability Council of Texas (ERCOT, A1, Neg), has a HRCO for substantially all of its energy and ancillary services generating capacity (approximately 300MW). According to Invenergy, Ector issued a notice of force majeure to the HRCO counterparty on February 13, 2021 and on February 23rd, notice was given that the events giving rise to the force majeure had abated. We understand that Ector has remained available to operate in the ERCOT market since.

While the amount of the actual claim is uncertain, we believe that the amount could be material relative to the value of the Ector plant. Importantly, ITOI senior lenders' collateral includes a pledge of the Ector asset and a pledge of the Ector equity such that any claim asserted by the HRCO counterparty would be subordinated to the secured position of the ITOI senior creditors apart from $7 million in collateral pledged to the HRCO counterparty under a letter of credit (L/C) issued under ITOI's $70 million revolving credit facility. That said, to the extent the dispute remains unresolved, it could, in our view, lead to a bankruptcy filing by Ector which could lead to an impairment of the ITOI collateral as it pertains to Ector, and have the potential for incremental contagion effect at ITOI. In the event of a bankruptcy filing by Ector, the lenders will have the right to enforce their first-priority lien on Ector's collateral, although the value that lenders' may receive for Ector in bankruptcy (which would be applied as prepayment of the ITOI loan) is unknown at this time.

Historically, Ector has not been a significant cash flow generator to the portfolio, only contributing around $10.3 million of the $123.3 million, or 8.3%, in EBITDA available to ITOI in FY 2019. When using audited financials, Moody's calculates ITOI's DSCR for FY 2019 at 1.63x and when excluding Ector's contribution to cash flows, the DSCR would have a minor decrease to 1.59x. Per unaudited results, in FY 2020, Ector's contribution to EBITDA was $14.8 million of the consolidated $137 million, or 10.8% of the EBITDA available to ITOI. Prior to the recent weather event, Moody's anticipated a DSCR of 1.49x in FY 2021. Excluding Ector and any impact from the financial settlement, we believe ITOI's DSCR would decline to around 1.40x. Further, Moody's anticipated a FFO/debt of 20.5% in FY 2021 which could decline to approximately 19% when removing Ector, excluding any impact from the HRCO financial settlement.

The amendment also allows Ector to utilize $7 million in excess cash reserves to reimburse lenders in the event the L/C is drawn, and places a cap on any incremental ITOI liquidity support for Ector under the revolving credit agreement which is positive for ITOI lenders as no such restriction exists.

Apart from Ector related items, the amendment provides a consent to the Nelson expansion project, an ability to execute shared facilities agreements and a partial collateral release of Nelson's 33% interest in shared property (except ComEd easement). The Nelson expansion project is a 314 MW, 2-unit (GE 7FA), simple cycle expansion of the existing Nelson project that would utilize existing premises, foundation and utilities already installed at Nelson. The expansion is fully permitted, with commercial operation date estimated at the end of 2022. Funding of remaining construction expenses is expected to be provided by a combination of equity from the sponsors and third-party financing at a later date. Once operational, the expansion would provide shared operating cost savings to the existing Nelson project, benefitting the ITOI portfolio. The amendment allows Nelson to make certain shared facilities' upgrades (including gas yard enhancements, substation improvements and constructing a warehouse). The amendment also covers insurance changes primarily to align deductibles with current market conditions (higher deductibles), and certain changes regarding earthquake and windstorm coverage related to Grays Harbor and Hardee respectively.

The rating affirmation incorporates the fact that the portfolio relies heavily on merchant-based cash flows derived from Nelson, a combined cycle plant in northern Illinois for around 50% of CFADS, whose recently improved financial performance has been aided by transmission upgrades and who benefits from the receipt of PJM capacity auction revenue. The rating affirmation also considers that over 30% of CFADS comes from four contracted assets, each of which are encumbered and subject to a 1.20x debt service coverage ratio (DSCR) distribution test. Although there is some level of stability with respect to CFADS, the four contracted projects are encumbered and subject to a 1.20x debt service coverage ratio (DSCR) distribution test. All projects have reasonable cushions with respect to meeting such tests.

Total consolidated debt outstanding as of 12/31/2020 was $659 million, consisting of a $366 million term loan at Invenergy Thermal and $293 million in structurally senior project level debt attributable to Invenergy at the St. Clair, Hardee, Cannon Falls, and Spindle Hill projects.

The security package includes a first lien pledge of the assets and stock of Grays Harbor, Nelson and Ector as well as a first lien on the stock of the indirect owners of the remaining four assets (subject to a 65% limitation in the equity interests of non-U.S. jurisdictional entities). There is a total of about $293 million of project level debt attributable to Invenergy at the St. Clair, Hardee, Cannon Falls, and Spindle Hill projects, paid down from $342 million in FY 2018. The project does not have the ability to incur additional debt, with the exception of refinancing transactions at the opco level, and typical change of control provisions. The project benefits from quarterly distributions subject to a 1.2x DSCR distribution test and a six month debt service reserve requirement, and a 1% minimum amortization. Permitted asset sales with target minimum levels for both Ector and Grays Harbor are in the documentation. There is also a 75% of excess cash-flow sweep feature which further steps down to 50% in the event the leverage ratio (Net Debt of Borrower/ consolidated CFADS) drops to below 4.0x, and to 25% when the ratio is < 2.0x.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the negative outlook, the rating is unlikely to be upgraded anytime soon. The outlook could be stabilized however if there is a successful resolution of the HRCO financial settlement eliminating future uncertainty on sponsors' financial flexibility and unforeseen consequences to ITOI. Longer term, the rating could be upgraded if there is significantly higher cash flow generation than anticipated on a sustained basis, in particular from Nelson, resulting in greater debt repayment and stronger credit metrics on a sustained basis such as > 2.5x DSCR and > 20% FFO/debt on a consolidated basis.

The rating could be downgraded if a successful resolution to the HRCO financial settlement is not achieved leading to continued uncertainty and contagion risk for ITOI lenders, and cash flow generation is lower than currently forecasted when excluding Ector, in particular for the Nelson plant, leading to weaker consolidated credit metrics of <1.50x DSCR or < 15% FFO/Debt on a sustained basis, or if there are significant operating issues at any of the projects leading to an inability to generate and distribute excess cash flows to the Borrower.

Invenergy holds interests in a diversified portfolio of seven operating natural gas-fired plants located throughout the United States and Canada. Four of the projects are wholly owned (St. Clair, Nelson, Ector and Grays Harbor) while the other three (Cannon Falls, Spindle Hill and Hardee) are owned 51% by the Sponsor. The gross capacity of each plant ranges from 314 MW to 620 MW and the net capacity of the portfolio is 2,680 MW. Five of the plants (Cannon Falls, Spindle Hill, Hardee, St. Clair and Grays Harbor) have been operating for several years while Nelson and Ector began commercial operations in 2015.

The principal methodology used in these ratings was Power Generation Projects Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1236893. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Jennifer Chang
Vice President - Senior 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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