Approximately $525 million of securities affected
New York, January 04, 2011 -- Moody's Investors Service has assigned a Ba3 rating to EquiPower Resources
Holdings, LLC (EquiPower or Projects) proposed $525 million
in senior secured credit facilities comprising of a $425 million
7-year term loan and a $100 million 5-year senior
secured working capital facility. The rating outlook is stable.
EquiPower is expected to own four gas fired power projects totaling 1,792
MW and EquiPower is owned by private equity funds managed by Energy Capital
Partners and some of its co-investors. The Projects consist
of the 812 MW Lake Road and 548 MW Milford projects in Connecticut and
the 264 MW MassPower and 168 MW Dighton projects in Massachusetts.
The Projects reached commercial operation from 1993 to 2004. Given
the Projects' location in ISO-NE market, the Projects
benefit from the forward capacity market (FCM). EquiPower also
has in place financial hedges for approximately 61% of Lake Road's
capacity, 89% of Dighton's capacity, and 46%
of Milford's capacity. Power sales management and hedging
are expected to be performed by EquiPower Resources Management.
EquiPower will self manage its operations and maintenance for three of
the four plants while EquiPower is evaluating whether to retain Alstom
as O&M operator or self manage for the Milford plant. Dighton,
Lake Road and Milford have existing long-term services agreements
with Alstom and these agreements mature roughly between from 2011 to 2015.
MassPower does not have a LTSA.
The proceeds from the $425 million of term loan will be used to
fund the purchase of Milford, fund approximately $42.5
million in sponsor distribution, fund a $25 million capex
reserve and pay approximately $17.5 million in fees and
expenses. Approximately $17.8 million of the $100
million revolver will be used to issue a debt service reserve letter of
credit and $19.3 million will be used to issue a letter
of credit or other cash collateral to back various obligations including
a MassPower lease obligation and an ICE account.
The Ba3 rating reflects approximately 80% of hedged gross margin
over the next three years, substantial equity investment by EquiPower's
sponsor leading to relatively low leverage around $237/kw,
operational diversification across four plants and the competitiveness
of Milford and Lake Road. The rating also considers 3-year
average DSCR of 1.7x and FFO/Debt of 7% under more conservative
scenarios, imperfections in the financial hedges, cash flow
concentration at the Lake Road and Milford projects that have had historical
operating problems, and some project finance weaknesses.
The Ba3 rating for EquiPower considers the following credit strengths
Key Credit Strengths
Approximately 80% of gross margin for the next 3-4
years are sourced from known FCM payments or financial hedges with strongly
The four projects provide operational diversification across four
plants and three different technologies
The Projects benefit from capacity markets given their location
in the ISO-NE market
Milford and Lake Road have competitive heat rates and Milford has
operated at or near baseload levels on a historical basis
Substantial equity investment by EquiPower's sponsor contributes
to relatively low leverage for the rating with debt to capital at 52%
and debt equal to $237/kw
Some project finance features including 6-month debt service
reserve, capex reserve, security in assets, and 100%
excess cash sweep.
Key Credit Weaknesses
Exposure to volatile merchant energy and capacity prices significantly
increase in 2014 and fully merchant by 2015
The Projects' financial hedges have multiple imperfections
(power and fuel basis differences, no allowance for outages,
no pass through of carbon costs and no start charges)
Forecasted cash flow generation remains concentrated with Lake
Road providing roughly 50% of consolidated cash flow and Lake Road
and Milford combined providing well over 90%.
Lake Road and Milford have had a history of various operational
problems and the Projects' forecast has aggressive operating assumptions
compared to historical
Dighton and MassPower's higher heat rates results in a peaker
type operational profile that does not match their originally intended
baseload operating profile, which could lead to operating problems
Several project finance features are weak or lacking including
ongoing major maintenance reserve, use of a collection account instead
of a traditional cash flow waterfall and the ability to dividend a portion
of the sale proceeds of Dighton or MassPower above specific sale price
Average cash flow metrics correspond to the 'B' category under
Moody's methodology with around 6-7% FFO/Debt and 1.6-1.7
times DSCR under various conservative cases considered by Moody's compared
to 12.6% FFO/Debt and 2.25 times DSCR under the base
EquiPower's stable outlook reflects Moody's expectation of substantial
debt amortization by debt maturity, improving operations at Lake
Road and Milford and financial metrics commensurate with at least 7%
FFO/Debt and 1.7 times DSCR even under adverse scenarios.
The stable outlook also considers the expectation that energy prices are
likely to moderately improve over time while capacity prices are expected
to stay the same or improve over time.
Limited prospects exist for a rating upgrade in the near term.
Over the longer term, positive trends that could lead to an upgrade
include greater than expected debt reduction and cash flow credit metrics
solidly in the 'Ba' category under Moody's methodology.
The rating could be downgraded if the Projects incur operating problems,
if the Projects achieve financial metrics below expectations or if EquiPower
does not achieve forecasted debt amortization levels.
The ratings are predicated upon final documentation in accordance with
Moody's current understanding of the transaction and final debt sizing
consistent with initially projected credit metrics and cash flows.
The principal methodology used in this rating was Power Generation Projects
published in December 2008.
EquiPower expects to own four gas fired power projects totaling 1,792
MW and EquiPower is owned by a private equity fund managed by Energy Capital
Partners and several of the funds co-investors. The Projects
consist of the 812 MW Lake Road and 548 MW Milford projects in Connecticut
and the 264 MW MassPower and 168 MW Dighton projects in Massachusetts.
The Projects reached commercial operation from 1993 to 2004. Energy
Capital Partners manages private equity funds that invest in the power
generation, midstream gas, renewable energy, and electric
transmission sectors of North America's energy infrastructure.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not 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 assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify 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
for further information.
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.
Clifford J Kim
Vice President - Senior Analyst
Project Finance Group
Moody's Investors Service
Chee Mee Hu
MD - Project Finance
Project Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates EquiPower's senior secured debt facilities at Ba3. Outlook is stable
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