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Global Credit Research - 26 Aug 2010
$486 million debt affected
New York, August 26, 2010 -- Moody's Investors Service has downgraded the rating on AES Eastern
L.P.'s (AEE) $486 million of Pass-Through
Trust Certificates Outstanding to Ba2 from Ba1. The outlook remains
..Issuer: AES Eastern Energy, L.P.
....Senior Secured Pass-Through,
Downgraded to Ba2 from Ba1
The downgrade reflects the significant deterioration in the project's
financial performance in the first half of 2010. In addition,
a significant increase in the project's merchant market exposure
and the currently weak state of the wholesale energy market in which the
project operates support Moody's expectation that financial performance
will remain considerably weaker than recent historical levels over the
next several years. The Ba2 rating is supported by the project's
relatively high level of liquidity and the conservative restricted payments
test, which is expected to result in even higher levels of liquidity
in the coming years. This provides the project with a valuable
cushion in the event its financial performance deteriorates further than
The negative outlook considers the impending maturity of the project's
revolving credit facility as well as the Parent company letter of credit
facility upon which it relies to satisfy counterparty collateral requirements.
The rating could be downgraded further if the project and its Parent company
are unable to renew or extend these facilities prior to their maturity,
if the project's financial performance deteriorates more than currently
anticipated such that total rent coverages are expected to fall below
1.35x for a sustained period of time, or if it traps less
cash than expected over the coming years and is unable to defer or find
alternative means of financing for its significant planned capital expenditures,
. Given the negative outlook, the rating is unlikely to be
upgraded in the near to medium term. However, the outlook
could be stabilized if the credit facilities are successfully extended
or renewed and the energy market in which the project operates shows signs
of sustainable improvement.
Due to the decline in energy prices and the expiration of many of the
project's energy hedges, non-deferrable rent coverage
fell to 1.44x in first half of 2010 (total rent coverage fell to
1.37x) from 2.12x over the previous six months and a peak
of 4.6x in the six months ended December 2007. As a result,
the project was unable to meet its 1.7x restricted payments test
(there is an additional 2.0x test at the holdco) and $13
million in excess cash flows were trapped. The restricted payments
test includes a 1-year look back and a 2-year forward (both
calculated for individual six-month periods. Based on this,
management does not anticipate it will be able to make distributions until
Moody's notes that the restricted payments test is very high relative
to other projects, a relative credit strength. As a result,
the project is expected to accumulate substantial excess cash flow over
the next several years, which should provide a degree of cushion
in the event markets deteriorate further than expected (but a substantial
portion of which may to be utilized to finance upcoming capital expenditures).
This will complement the project's already high level of liquidity
provided by its six-month cash funded non-deferrable rent
reserve (equal to six months debt service on the trust certificates) and
its additional liquidity reserve, also sized at six months non-deferrable
rent and fulfilled with a letter of credit provided by the project's
Coverage is currently projected to drop further to 1.33x in the
second half of 2010 notwithstanding a 20% forecast increase in
energy revenues, partially offset by a 30% increase in variable
costs. The increase in both revenues and variable costs is driven
by a projected increase in capacity factors to 96% from 73%,
which appears to be optimistic based upon the project's recent performance.
(Between 2011 and 2014, capacity factors are expected to average
91%. While this is still somewhat aggressive in Moody's
opinion, it is more reasonable than the forecast for the second
half of the year.)
In the first half of 2011, the project has just 2% of its
capacity hedged. It has no other energy hedges thereafter,
and it has no gas hedges for the year either. This contrasts sharply
with the company's hedged position prior to 2009. As recently
as June 2008, it was 65% hedged through the end of 2009 and
10% hedged through 2010 and it was even more hedged in prior years.
The company is reluctant to enter into hedges because of a compressed
Dark Spread, implied forward curve market heat rates which are roughly
1,000 Btu/kWh below recent historical performance, regulatory
uncertainty and reduced market liquidity. However, the company's
reluctance may ultimately hurt it because forward gas prices for 2011
have dropped from over $7.00/mmBtu as of the beginning of
2009 to less than $5 currently.
Nevertheless, coverage is projected to rebound somewhat in 2011,
but in the first half of 2012 it projected to fall below 1.0x due
to costs associated with the forecasted purchase of RGGI emissions credits.
Another rebound is expected in the second half of 2012, but in 2013
and 2014 coverage is projected to average just 0.67x due to significant
forecasted capital expenditures. If not for the capex, projected
coverage would average a considerably stronger, though still narrow,
1.35x over this time period. The capex is expected to be
financed from excess cash flows that are trapped between now and 2012.
Based upon management's forecast, the project will accumulate
$94 million in excess cash flow over that time frame, which
is nearly double the expected cash flow shortfall of $50 million
in 2013 and 2014.
While the current market forward implied heat rate for 2011 is just over
7,000, the financial forecast assumes an average market heat
rate of nearly 8,000 for the same period. This is roughly
equal to the average heat rate over the twelve months through June 30.
From 2012 to 2014, the average heat rate is forecast to drop to
7,250. Natural gas prices are projected to increase steadily
from around $4.75/mmBtu currently to $7 by 2014.
As a result, peak period power prices are projected to increase
from $38/MWh in the second half of 2010 to over $50/MWh
Market implied heat rates declined slightly in the first six months of
this year after increasing considerably in 2009, to an average of
about 8,100 Btu/kWh compared to just 7,000 in 2008.
However, this reflected the fact that gas was displacing coal in
the dispatch stack during certain periods as a result of the decline in
gas prices coupled with an increase in coal prices, coupled with
the adverse impact of high gas prices on heat rates during periods when
coal was on the margin in 2008. Reflecting the drop in demand for
power together with low gas prices, the 365 day rolling average
around the clock price for energy in the region in which the project is
located had fallen to just $33/MWh as of the end of June from $47/MWh
a year earlier and around $60/MWh the year before that.
Dark spreads were further compressed by a 25% increase in market
coal prices since 2009, though the project is attempting to mitigate
this by maximizing its fuel flexibility. As a result, the
project's capacity factor has declined considerably, to just
55% in 2009 from 80% the previous year and 85% in
2007. While management estimates that the capacity factor would
have been as high as 70% were it not for a significant outage at
its largest facility, this still represents a significant decrease
from the previous year. Average capacity factors remained roughly
the same in the first five months of 2010.
Both AES Eastern's $75 million working capital facility and
its parent's $350 million letter of credit facility (used
to fulfill the project's collateral posting requirements) expire
on July 2, 2011. The company is currently in negotiations
to extend or replace them. It hopes to have the negotiations concluded
by the end of the year. The Parent LC facility is used to satisfy
the project's collateral posting requirements. Partly because
of the impending maturity of this facility, the project has been
unable to enter into longer term energy and gas hedges. Because
of the deterioration in energy markets, however, management
no longer feels it requires such a large facility so it may downsize it
in conjunction with the renewal or extension. As of June 30 ,
2010, there were a total of $49.4 million in letters
of credit written under these two facilities, including $30
million for the additional liquidity reserve.
The last rating action on the company's debt occurred on September 30,
2009 when the outlook was revised to negative.
The principal methodology used in rating AES Eastern Energy, L.P.
was Power Generation Projects rating methodology published in December
2008. Other methodologies and factors that may have been considered
in the process of rating this issuer can also be found on Moody's website.
AES Eastern operates a portfolio of four coal-fired power plants
with a total of 1,166 MWs of baseload generating capacity in western
New York. The portfolio includes facilities at Somerset (675 MW)
and Cayuga (303 MW), which are leased from independent owner trusts,
in addition to smaller and older units at Westover (84 MW) and Greenidge
(104 MW), which are owned by subsidiaries of AEE. All four
plants participate in the NYISO's wholesale energy and capacity markets
on a merchant basis. Somerset and Cayuga, which have historically
been among the lowest cost assets in western and central New York,
generate the large majority of the portfolio's cash flows. AES
Eastern is a wholly owned subsidiary of AES NY, LLC and AES NY2,
LLC, which are, in turn, both wholly owned subsidiaries
of AES Corporation (B1 corporate family rating). The Pass Through
Certificates secured by lease payments from AEE (senior unsecured obligations
of AEE payable from all of AEE's cash flows, including those generated
by the AEE-owned plants), in addition to liens on the Somerset
and Cayuga facilities.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings and public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's Investors Service adopts all necessary measures so that the information
it uses in assigning a credit rating is of sufficient quality and from
reliable sources; however, Moody's Investors Service does not
and cannot in every instance independently verify, audit or validate
information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
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Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Chee Mee Hu
MD - Project Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades AES Eastern to Ba2; outlook negative
250 Greenwich Street
New York, NY 10007
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