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Rating Action:

Moody's assigns Ba2 to AL Gulf Coast Terminals Term Loan

03 Jun 2010

$305 million of debt affected

New York, June 03, 2010 -- Moody's Investors Service has assigned a Ba2 rating to the $305 million senior secured term loan facility due 2016 (or possibly 2017), to be issued by AL Gulf Coast Terminals, LLC ("AL GCT", "HoldCo" or "Borrower" ). AL GCT is a holding company set up by ArcLight Capital Partners, LLC ("ArcLight") to hold its 100% ownership interest in Houston Fuel Oil Terminal Company ("HFOTCO" or "OpCo"), which it acquired in two stages in 2007 and 2009. The rating outlook is stable.

Loan proceeds will primarily be used to: i) pay a distribution to equity in the amount of $138.9 million; ii) repay an existing HoldCo credit facility in the amount of $150.0 million; and iii) cash fund a debt service reserve account, which is sized to meet 6-months of required debt service.

ArcLight owns AL GCT, and in turn HFOTCO, through ArcLight Capital Partners Fund IV, LP (Fund IV). Subsequent to the acquisition of HFOTCO, ArcLight is pursuing a recapitalization plan through the HoldCo, its wholly owned subsidiary, AL GCT.

Fund IV is a $2.1 billion private equity fund formed by ArcLight, a private equity investment firm founded in 2001 and focused exclusively on the power and energy sectors. ArcLight has approximately $6.8 billion under management, with over 6,000 net MWs in operation or construction across its four funds. ArcLight owns a diverse portfolio of companies in the power generation, transmission and distribution, midstream and upstream sectors.

The operating company, HFOTCO, is the largest provider of residual fuel and crude oil storage in the Gulf Coast with 11.6 million barrels of tankage, which will increase to 13.3 million barrels by September, 2010. In addition, HFOTCO is one of the largest such facilities in the world. HFOTCO's sheer scale also enables the company to provide additional ancillary services and optionality for its customers, including product heating, blending and transportation services for regional refiners, major integrated oil companies and trading operations. The facility's existing infrastructure also offers customers multiple inbound/outbound logistics options including: deepwater ship, ocean barge, inland barge, truck, rail and pipeline access.

The Ba2 rating reflects the highly contracted nature of the cash flows, the low operating risk associated with this storage asset, the credit quality of the contract counterparties and the contract diversification. However, the rating also reflects the high consolidated leverage on the combined enterprise and the structural subordination of the HoldCo term loan facility to the debt at the OpCo level. Repayment of the HoldCo loan is dependent upon residual, distributed cash flows coming up from the OpCo after servicing debt at the OpCo level. The current capital structure also incorporates a significant amount of consolidated leverage, at approximately 8 times Debt to EBITDA in 2010. Having said that, the rating also considers several qualitative project elements with emphasis on key credit strengths relating to HFOTCO's strong market position, low operating risk and strong customer base support.

The Ba2 senior secured rating for AL GCT considers the following strengths:

- All rental revenues are 100% contracted on a take-or-pay basis with fixed rate capacity charges, providing a stable and predictable stream of cash flows

- No commodity risk; HFOTCO does not take title to the inventory being stored in its facilities

- HFOTCO's strategic location combined with supporting infrastructure provide high barriers to entry

- Contracted counterparts are largely investment grade with long tenured relationships (15-yr avg.)

- Contract diversity, where no one customer represents more than 8% of capacity

- The terminal is tied to the international market for residual oil, bunker fuel, asphalt and other "black" oil markets, where growth in the developing world -- especially India and China -- which needs these products to support economic growth and electricity production, helps to offset declines in the developed OECD world. The size of the market imbalance is more important to HFOTCO than the size of the total domestic market for resid that continues to decline.

- Low business and operating risk profile

- HFTOCO enjoys a 3.5 million barrel capacity backlog from prospective and existing customers, providing additional headroom should a customer leave unexpectedly

- Management team is strong and well experienced; Arclight is a strong sponsor, playing a proactive role in many of their projects

- Existing residual fuel tanks can easily be converted to support other fuel types should it be necessary

The rating also reflects the following areas of credit concern:

- Structural subordination; the borrower will be structurally subordinated to debt at HFOTCO; no deleveraging is expected at HFOTCO under the base case

- Refinancing risks associated with debt at HFOTCO can potentially diminish OpCo's ability to supply sufficient cash flow to the borrower

- There is also refinancing risk at Al GCT under certain downside scenarios

- About 56% of existing storage lease agreements are pending renewal at a higher rate within the term loan tenor period; Re-contracted rates are expected to be significantly higher than their prior rates (average increase of 40-50%)

- Contracts are not long term (typically 3 to 5 years), but customers have historically renewed; all customers who have come up for renewal at the end of 2009 and the first quarter of 2010 have done so even at the higher recontracted rate

- Significant reliance on residual fuel, combined with potential consolidations in the U.S. oil refining business exposes HFOTCO to unexpected demand risks born by customers

- Minor construction risk with regards to Phase 1 & 2 expansion projects, which is expected to be completed by September 2010; and ship dock #4 expansion plan expected to be completed by 2011; HFOTCO bears all construction risk by self performing the construction project

- Increased global environmental regulation may reduce the use of residual oil, which can potentially further weaken demand prospects for residual fuel

The credit facilities will be secured by a perfected first priority security interest in all the assets of AL GCT and the Sponsor's interest in the Borrower.

Moody's also considered structural features in the term loan agreement, including a cash sweep of 50% or up to 100% subject to a Target Debt Balance test for years 1-3; 75% for year 4; and 100% for years 6-7. The transaction provides for only a 1% required annual amortization, with additional amortization to be based upon the cash flow sweep mechanism. There is also a 6-month debt service reserve covering forward interest and scheduled debt service, which will be funded in cash or via a letter of credit to be provided by the Sponsor and a set of financial and other covenants that restrict the business and financial activities of the Borrower. There will also be a prohibition on additional debt at the Borrower, AL GCT (the HoldCo) as well as limitations on the incurrence of additional debt at HFOTCO ( the Opco). Additional debt at HFOTCO will be limited to up to $50 million, which can only be used for new tank storage or for other capex purposes and is subject to rating affirmation of the rating at the HoldCo. This will help to limit the amount of structural subordination at the operating company level.

The stable outlook reflects the expectation that the diversified portfolio of contracts will generate relatively stable and predictable cash flows, as the cash flows are derived from medium term contracts with predominantly investment grade counterparties.

Positive trends that could lead Moody's to consider an upgrade would include more rapid paydown of debt than currently projected and better than projected base case financial performance. Negative trends that could lead Moody's to consider a downgrade would include credit deterioration by contractual off-takers, substantial financial and/or operating performance difficulties that result in a meaningful loss of cash flow available for debt service.

The rating is predicated upon final documentation in accordance with Moody's current understanding of the transaction and final debt sizing consistent with initially projected credit metrics.

AL Gulf Coast Terminals, LLC's rating was assigned by evaluating factors we believe are relevant to the credit profile of the issuer, such as i) the business risk and competitive position of the company versus others within its industry, ii) the capital structure and financial risk of the company, iii) the projected performance of the company over the near to intermediate term, and iv) management's track record and tolerance for risk. These attributes were compared against other issuers both within and outside of AL Gulf Coast Terminals, LLC's core industry, and AL Gulf Coast Terminals, LLC's rating is believed to be comparable to those of other issuers of similar credit risk.

AL Gulf Coast Terminals, LLC is a special purpose entity formed by ArcLight Capital Partners, LLC to hold its 100% ownership interest in Houston Fuel Oil Terminal Company ("HFOTCO"). HFOTCO is the largest provider of residual fuel and crude oil storage in the Gulf Coast with 11.6 million barrels of tankage, which will increase to 13.3 million barrels by September, 2010.

New York
Richard E. Donner
VP - Senior Credit Officer
Project Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Chee Mee Hu
Managing Director
Project Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Ba2 to AL Gulf Coast Terminals Term Loan
No Related Data.
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