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Rating Action:

Moody's assigns B1 rating to InterGen's senior secured revolving credit facility, term loan and notes; Outlook changed to stable

Global Credit Research - 22 May 2013

New York, May 22, 2013 -- Moody's Investors Service ("Moody's") has assigned a B1 rating to InterGen N.V.'s (InterGen) proposed $500 million senior secured revolving credit facility due 2018, its $500 million senior secured term loan due 2020, and its $800 million senior secured notes due 2021 and 2023. InterGen's rating outlook is changed to stable from negative.

RATINGS RATIONALE

The B1 rating reflects InterGen's exposure to weak merchant power markets in multiple jurisdictions that will impact cash flow generation at InterGen's core assets over the next 18-24 months. While financial results will remain challenged in this environment, the B1 rating and stable rating outlook incorporates the company's strengthened capital structure that will materialize following the sponsors injection of $700 million in equity into the company. With this balance sheet strengthening and accompanying debt reduction, we calculate that the company should be able to maintain a debt service coverage ratio (DSCR) of holding company interest expense and mandatory term loan amortization in excess of 1.40 times under most Moody's downside scenarios, despite operating in weak merchant power markets.

InterGen's financial profile further benefits from a large and geographically diverse generating fleet, which features a component of long-term contracted assets with credit-worthy counterparties. Notwithstanding the positive implications for InterGen following the balance sheet strengthening, the geographic diversity, and the degree of contracted cash flow, the B1 rating recognizes InterGen's growing exposure to merchant power markets, the high consolidated debt burden, with the majority of the debt being project-level and non-recourse to InterGen, as well as a financing structure that provides the company with greater financial flexibility than the former structure.

An important rating consideration is the substantial degree of sponsor support provided by InterGen's co-owners (Ontario Teachers' Pension Plan and China Huaneng Group/Guangdong Yudean Group) as most recently evidenced by the $700 million equity contribution to the company in conjunction with the current refinancing. In addition to the $700 million incremental equity contribution, we understand that since 2007 the sponsors have recommitted more than $400 million in equity that could have otherwise been distributed. We view these actions by the sponsor group as a clear indication of the strategic importance of the InterGen platform over the long-term.

Upon transaction close, InterGen's holding company debt will be reduced by $537 million, enabling the holding company capital structure to stabilize at approximately 60% debt-to-total capitalization. Of particular note is the fact that the most recent credit supportive actions are being taken in the face of weak merchant markets in several of the regions that InterGen has operations. As such, our rating incorporates a view that the sponsors will continue to pursue strategic actions necessary to support the company over the long-run.

Notwithstanding this substantial level of sponsor support, InterGen's financial performance in 2012 saw a material decline in cash flow generated from its core UK assets as distributions from the UK assets fell by approximately 40% compared with the prior year owing to the weak wholesale market conditions in the UK and lower achieved clean spark spreads. The narrowing clean spark spreads have been driven by a combination of new capacity additions entering the UK market, declining coal prices that have pushed natural gas-fired generators further out on the dispatch curve, high natural gas prices (which are tied to the price of oil in the UK), a weak economic recovery and low carbon prices.

Moody's believes that many of the factors currently impacting the UK wholesale power market, especially weak clean spark spreads, will persist over the next 18-24 months. Current forward curves show a wide discrepancy between clean spark spreads and clean dark spreads that favor coal-fired plants over the time horizon. The influx of combined-cycle gas generation supply that has come on-line over the last three years will keep the UK market at over-capacity, at least through 2015, which will temper wholesale market prices as the overall UK economy struggles to find consistent growth traction to support electricity demand. Adding to the challenges for InterGen is the expiration of two power purchase contracts at the Rocksavage plant which exposes the company to an additional 704 MW of merchant capacity in the UK wholesale power market beginning in April 2013.

Additionally, gas-fired power plants in the UK have also seen their dispatch diminished by the coal plants that opted out of the EU-wide Large Combustion Plant Directive (LCPD). These plants have been dispatching more frequently in order to utilize their maximum 20,000 operating hours by 2015, after which point these assets will be retired. Approximately 12 GW of UK capacity will be impacted by the LCPD. If there is no change in legislation and all of these plants retire as scheduled, the current oversupply situation in the UK would shrink and therefore lead to improving market conditions in the post-2015 time period. However, the UK's commitment to increase the share of renewable energy sources, primarily wind, in the energy supply mix could temper clean spark spread improvements, and result in InterGen's merchant UK assets capturing peak and inter-peak merchant energy gross margins with lower dispatch factors.

We also observe that 550 MW of La Rosita's capacity will become merchant by the end of September 2014. The plant's proximity to the US border with California gives it a favorable dual-interconnection advantage into the Mexican power market and the CAISO SP-15 market. SP-15 has seen power prices and clean spark spreads on the rise this spring due to higher natural gas prices, weak hydrology flows and the extended San Onofre Nuclear Generating Station outage. The implementation of AB32 carbon cap-and-trade should also benefit California power prices. La Rosita's ramping capabilities will prove increasingly beneficial as greater amounts of renewable generation are added to the California grid as utilities work toward the 33% renewable portfolio standard by 2020. The remaining 489 MW at La Rosita continue to be contracted with Comision Federal de Electricidad (Baa1 stable), the Mexican utility, though 2028.

Importantly, the proposed transaction addresses a very large refinancing risk that the company faced, which had been cited as a negative rating factor in prior research. The refinancing moves all of the funded holding company debt to a maturity of at least seven years, or to 2020, with more than 60% of the holding company capital structure maturing beyond seven years. The five year revolving credit facility represents an important source of liquidity to InterGen, particularly for working capital needs, letter of credit postings for operational projects and as a source for securing equity commitments to development projects. The planned five-year tenor should provide an adequate runway for the company, particularly as the Altamira gas compression station and San Luis de la Paz power project achieve commercial operations in 2014 and 2015, respectively.

The terms and conditions of the proposed transaction structure does not contemplate an excess cash flow sweep mechanism, nor a required debt service reserve fund, both credit weaknesses. These provisions, in addition to the corporate-like flexibility with regard to asset sale proceeds and investing in other electric generating assets, make the financing terms more comparable to the terms and conditions associated with a corporate, unregulated power producer financing rather than a traditional power project financing. The revolver, term loan and notes will be secured by a perfected first lien in the capital stock of the InterGen's wholly-owned subsidiaries. Importantly, we observe that there is no indebtedness at the Tier 1 subsidiaries, which collectively represent 3,545 megawatts (MWs) of electric capacity or 58% of the company's net MWs owned. Under the terms of the financing documents, InterGen can only incur limited levels of indebtedness at the four generation assets that comprise the Tier 1 subsidiaries thereby reducing the degree of structural subordination for InterGen creditors. The financing documents contemplate the maintenance of a DSCR of 1.1 times as well as a restricted payments test for distributions of a DSCR of 1.4 times.

The stable outlook incorporates Moody's view that the current refinancing transaction and equity contribution have stabilized the company's financial profile, and should result in holding company DSCR above 1.40 times on a consistent basis.

The rating is not likely to go higher in the near-to-intermediate term, given the current outlook for UK spark spreads and the further shift towards a more merchant generation profile; though substantial improvements in merchant power markets, re-contracting existing assets with investment grade counterparties, or adding additional contracted assets that generate meaningful cash flow to the company could result in positive rating implications.

The rating could face downward pressure if there is further deterioration in cash flow generation that impacts financial metrics, or if the portfolio assets experience operational issues that have a sustained impact on the company's performance.

Upon completion of the proposed financing, Moody's intends to withdraw the B1 ratings assigned to the existing InterGen's debt, including the senior secured revolver due 2014, the senior secured term loan due June 30, 2014, and the senior secured notes due June 30, 2017.

The last rating action was on January 28, 2013, when InterGen's senior secured rating was downgraded to B1 from Ba3, and a negative outlook was assigned.

InterGen N.V. is a holding company with a portfolio consisting of nine combined cycle, natural gas-fired projects and two coal-fired facilities with a net capacity ownership of 6,101 MW. The eleven operational plants are located in the UK, the Netherlands, Mexico and Australia. InterGen also owns the Bajio and Libramiento natural gas compression facilities and associated pipeline located adjacent to the Bajio power project. InterGen N.V. is owned by affiliates of China Huaneng Group, Guangdong Yudean Group, and The Ontario Teachers' Pension Plan Board.

The principal methodologies used in this rating were the Power Generation Projects methodology published in December 2012, and the Unregulated Utilities and Power Companies methodology published in August 2009. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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.

Richard Donner
VP - Senior Credit Officer
Corporate 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

Chee Mee Hu
MD - Project Finance
Corporate 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

Moody's assigns B1 rating to InterGen's senior secured revolving credit facility, term loan and notes; Outlook changed to stable
No Related Data.

 

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