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Rating Action:

Moody's assigns Ba2/Ba3 ratings to EFS Cogen's new proposed senior secured credit facilities; outlook stable

08 Sep 2020

Approximately $1,050 million of debt affected

New York, September 08, 2020 -- Moody's Investors Service ("Moody's") has assigned a Ba3 rating to EFS Cogen Holdings I LLC's ("EFS Cogen" or "Project" or "Borrower") proposed $950 million senior secured term loan B due 2027 and a Ba2 rating to EFS Cogen's super senior secured $100 million revolving credit facility due 2025. The rating outlook is stable.

Proceeds from the new senior secured term loan will be used to repay an outstanding term loan (approximately $839.1 million), to make a distribution to the equity sponsors and to pay transaction fees and expenses; while the new senior secured revolver will replace the existing liquidity facility. Moody's intends to withdraw the Ba3 rating on the existing secured term loan and the secured revolving credit facility upon the closing of the new credit facilities.

EFS Cogen owns a 974 MW 6-unit natural gas-fired combined cycle cogeneration plant in Linden, New Jersey that consists of Units 1-5 (809 MW) and Unit 6 (164 MW).

RATINGS RATIONALE

The Ba3 rating assignment for the senior secured term loan reflects the Project's location within a highly constrained load pocket, its strong historical operating performance, its unique competitive position, and our expectations for relatively predictable cash flow as an important asset serving the City of New York. These strengths are balanced by the Project's reliance on merchant power markets for a significant portion of its cash flows and the high leverage at financial close due in part to the dividends being paid to the Sponsors that contribute to somewhat weak financial metrics in the early years. For example, the ratio of Debt to EBITDA at the outset exceeds 6.0x, but is expected to decline over time from the benefits of the cash flow sweep, which should help produce credit metrics that are positioned towards the lower end of the Ba rating category.

The Ba2 rating assignment for the senior secured revolving credit facility reflects structural features that give any outstanding revolving credit facility draws a priority claim over the term loan during any bankruptcy reorganization or liquidation scenario. Because our ratings incorporate both the probability of default and loss given default probabilities, we have notched the rating of this super senior secured working capital facility one notch above the rating of the secured term loan.

A key rating consideration which helps to offset EFS Cogen's leverage is the Project's position as an efficient electric generator within New York City Zone J, a highly congested load pocket within the most constrained zone of the New York Independent System Operator (ISO), enabling it to earn premium energy and capacity pricing compared to other established power markets. Importantly, Units 1-5 currently provide approximately 19% of Zone J's "In-City" power generation. Moreover, EFS Cogen's location in New Jersey enables it to source less expensive natural gas supply relative to all other "In-City" generators. We believe that this competitive advantage is not likely to change over the life of the financing.

Lenders also benefit from some longer-term contracted revenues. Specifically, the Project provides critical steam and power to Phillips 66's Bayway Refinery and Infineum's Bayway Chemical Plant (a JV between ExxonMobile and Royal Dutch Shell) under long-term contracts that run through April 2032. Combined, these contracts are expected to generate approximately 20% of annual recurring revenue. The Phillips 66 Bayway refinery complex houses the largest refinery on the East Coast, and as such, EFS Cogen represents critical energy infrastructure.

FINANCIAL METRICS

The Sponsor's base case projections for capacity, energy and fuel prices have been developed based on a fundamental analysis performed by ESAI Power, LLC. Based on the Sponsor's base case assumptions, the Project's three-year average Project CFO/Debt is 14.9%, the three-year average debt service coverage ratio (DSCR) is 2.95x, and the three-year average Debt/EBITDA is 4.6x. These financial metrics score in the mid-range of the Ba rating category indicated in the Power Generation Projects Methodology (the Methodology). In this scenario, about 64% of the term loan is repaid from excess cash flow and mandatory amortization prior to its 2027 maturity date.

Moody's base case forecast incorporates lower capacity prices, lower natural gas and power prices, and 5% higher operations and maintenance expenses. Based on these more conservative assumptions, the Project's three-year average Project CFO/Debt is 8.2%, its three-year average DSCR is 2.04x, and the three-year average Debt/EBITDA is 6.1x. These financial metrics fall within the high B to low Ba rating categories as indicated in the Methodology, but as previously mentioned, we expect that EFS Cogen will produce credit metrics over time more strongly positioned in the Ba rating category. In the Moody's base case, we calculate that about 47% of the term loan is repaid from excess cash flow and mandatory amortization prior to maturity, suggesting that refinancing risk, while present, appears to be manageable. Although refinancing risk exists, the importance of Units 1-5 in providing in-city generating capacity and the critical infrastructure provided to the Bayway Refinery are additional mitigating factors.

STRUCTURAL FEATURES

The senior secured lenders benefit from standard project finance features, including a trustee administered cash flow waterfall of accounts, a six-month debt service reserve, a pledge of the assets and the Sponsor's ownership interests in the Borrower. Debt is repaid quarterly via a 1% scheduled amortization. There is also a mandatory quarterly cash sweep equal to 75% of excess cash flow with a leverage-based step down to 50% once the Net Debt to EBITDA ratio reaches 3.75x. As per the Moody's base case, the Project is not expected to reach this step down threshold until 2025. The terms of the proposed refinancing structure also contain one financial covenant: the maintenance at all times of a DSCR of at least 1.1 times.

RATING OUTLOOK

The stable outlook reflects an expectation for continued strong operating performance and improved financial results due primarily to higher capacity related revenues owing to the premium positioning of the assets.

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

FACTORS THAT COULD LEAD TO AN UPGRADE

EFS Cogen's rating is unlikely to be upgraded in the near-term owing to the anticipated leverage at financial close of the refinancing. Longer term, the rating could come under positive pressure should the credit metrics become more solidly positioned in the mid-Ba rating category on a consistent basis. Specifically, if the ratio of Project CFO/Debt exceeds 12% and the DSCR exceeds 2.5x on a sustained basis, consideration of an upgrade may be warranted.

FACTORS THAT COULD LEAD TO A DOWNGRADE

EFS Cogen's rating may be pressured should its ratio of Project CFO/Debt decline to below 8.0% on a sustained basis or if the generating facility experiences operating problems.

PROFILE

EFS Cogen owns a 974 MW 6-unit natural gas-fired combined cycle cogeneration plant in Linden, New Jersey that consists of Units 1-5 (809 MW) and Unit 6 (165 MW). A dedicated transmission line allows Units 1-5 to dispatch its electric output and capacity into New York City. EFS Cogen is owned 50% by JERA Co. Inc., a global energy company based in Tokyo, 14% by affiliates of Ares EIF, 14% by affiliates of Oaktree Capital, 12% by Rose Capital Investment and 10% by GS Platform (a consortium of South Korean power producers).

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_1133569.

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.

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.

Scott Solomon
VP - Senior Credit Officer
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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