Approximately $450 million of Pass Through Certificates affected
New York, July 21, 2011 -- Moody's Investors Service downgraded the 1999 Series Trust Pass Through
Certificates of AES Eastern Energy, L.P. (AEE) to
Caa2 from B3. The outlook remains negative.
The downgrade reflects continued deterioration in the financial performance
and prospects for the project, which includes a severely strained
liquidity profile - exacerbated by the recent termination of its
credit facility - and the potential for a relatively near-term
payment default or restructuring.
RATINGS RATIONALE
AEE's Caa2 rating is driven by the company's weak financial and
liquidity positions resulting from its operation as a 100% coal-fired
merchant power generator in an extremely challenging market in the western
portion of New York state. The combination of persistent low gas
prices and excess power supply have depressed power prices while the project's
operating costs, most notably the cost of coal, have continued
to rise resulting in severely depressed margins. At this point,
the project is essentially un-hedged, leaving it exposed
to volatile, and currently uneconomic market conditions, which
will make it exceedingly difficult for the company to continue to service
its fixed payment obligations.
AEE's rent coverage ratios, which had historically been well
above 2 times, declined to approximately 1.4 times in 2010
and to approximately 0.2 times for the first three months of 2011.
AEE's July 2011 semi-annual payment for debt service (approximately
$30 million) was made by utilizing funds held in the project's
rent payment reserve; a similarly sized debt service payment is required
in January 2012. As the company was unsuccessful in its efforts
to extend or replace its $75 million working capital facility -
which expired in early July, the project is entirely reliant on
internal sources of liquidity to service its payment obligations.
AEE's internal sources of liquidity are limited to its cash from operations
-- currently break-even at best - and its cash on hand,
which, net of required collateral postings, is estimated at
approximately $54 million. Cash on hand includes $30
million that was drawn from the project's additional liquidity letter
of credit, provided by its intermediate parent NY Surety LLC.
Operationally, the project has been performing generally as anticipated,
with capacity factors through May at the largest unit, Somerset
averaging above 70%, and at Cayuga, which was impacted
by planned spring maintenance, over 50%. The two smaller
units, Westover and Greenidge, have been put on "protective
lay-up" to conserve costs. As a result of these,
and other cost containment measures actively pursued by AES, including
the deferral of all noncritical capital expenditures, AEE has generally
been able to cover its operating costs (excluding debt service which is
paid as rent).
AEE's larger projects remain among the lowest cost coal generators
in the region, and the absolute amount of leverage on the project,
at approximately $460 kW, would seem manageable; however,
as a result of the current high cost of fuel, and the company's
sizeable fixed payment obligations, meaningful improvement in power
markets is still needed to enable the project to fully service its obligations
on an ongoing basis. We do not anticipate such improvement over
the near-to-medium term. That being said, we
do believe the recovery prospects for the lease debt holders should be
aided by the relatively modest leverage at AEE, and the attractive
dispatch position of the plants, particularly the Somerset unit.
The AES' Board of Directors has given its approval for the sale
of AES New York Funding, which owns AES' partnership interest
in AEE. AES is in the process of evaluating proposals from interested
parties -- the timing and outcome of this process remains unclear,
though in our view, some type of restructuring is likely.
AES has written down its investment in AEE to zero.
The rating is not likely to be revised upward in the near to medium term.
The outlook could be revised to stable if AEE can secure some form of
external liquidity sources or make other adjustments such that the project
will have sufficient liquidity to survive through a continued period of
low power prices. The rating could be revised downward if operational
issues surface at the plant which further stresses the project's
precarious liquidity profile, further weakening recovery prospects
for the certificate holders.
The principal methodology used in this rating was Power Generation Projects
published in December 2008. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology .
AES Eastern operates a portfolio of four coal-fired power plants
with a total of 1,166 MWs of base-load 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 are 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.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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.
Information sources used to prepare the rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
Moody's considers the quality of information available on the rated
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a rating.
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in assigning a rating is of sufficient quality and from sources Moody's
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and cannot in every instance independently verify or validate information
received in the rating process.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
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Please see ratings tab on the issuer/entity page on www.moodys.com
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the rating.
New York
Laura Schumacher
VP - Senior Credit Officer
Project Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Chee Mee Hu
MD - Project Finance
Project Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service, Inc.
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Moody's downgrades AES Eastern to Caa2 from B3, outlook negative
