Approximately $115 million of debt affected
New York, July 21, 2010 -- Moody's Investors Service has assigned a B1 rating to K2 Pure Solutions
NoCal, L.P's (K2 Pittsburg or Project) proposed $115
million senior secured term loan due 2015. The rating outlook is
K2 Pittsburg owns a chlor-alkali project under construction that
is located inside Dow's Pittsburg manufacturing site in Pittsburg,
CA . The Project is designed to produce up to 296.5 tons
per day of ECUs and up to 200 tons per day of bleach. The Project's
ECU facility primarily utilizes salt, water and electricity to produce
chlorine, caustic soda and hydrogen, commonly referred to
as electrochemical units ("ECU") via electrolysis.
The Project is able to further produce bleach by processing the chlorine
and caustic soda produced by its ECU facility. The Project is currently
under construction and is being built by DPR Construction Inc (DPR) under
a design-build contract (DB Contract). The expected construction
completion date is in April 2011 and completion of all commissioning activities
is expected by mid July 2011. Once in operation, the Project
will supply approximately 96 million pounds of ECUs to Dow Chemical Company
("Dow", rated Baa3) under a 20-year agreement
and the remaining output will be sold into the wholesale market.
A third party marketer will serve as the Project's marketing agent
for sales into the wholesale market with certain exclusions.
The proceeds from the $115 million term loan and approximately
$78 million of equity will be used to fund the construction of
the Project, pay interest during construction, fund reserves
and pay transaction costs. The Project sponsor will also provide
a $14.6 million of contingent equity to backstop a $14.6
construction contingency. The Sponsor's unfunded equity commitment
is expected to be backed by a letter of credit.
The B1 rating for K2 Pittsburg considers the following credit strengths:
Nearly 50% of total revenues under the base case are provided
under a 20 year "tolling" type agreement with Dow for the
The Project should be able to meet its minimum delivery obligations
to Dow since approximately half of the Project's capacity is merchant.
The Project benefits from location in a destination market and
benefits from rising transportation costs for chlorine.
The Project utilizes membrane technology which is more efficient
than the older diaphragm and mercury based production methods.
The Project will utilize mature technology and construction while
operating risks of chlor-alkali facilities are generally lower
relative to other types of projects such as gas-fired power plants.
Project is located inside to an existing Dow facility and the Project
benefits from an environmental indemnity for any direct costs incurred
due to environmental conditions not caused by the Project.
The Project is able to service debt under conservative cases considered
by Moody's while the Project's base case forecasts 3-year
average metrics at 31% FFO/Debt and 4.1 times DSCR
The Project benefits from $14.6 million of contingent
equity (8.7% of construction costs), DPR's internal
contingency of $3.7 million, approximately 9%
retainage on payments to DPR, OEM performance guarantees for major
pieces of equipment, relatively short construction with COD around
Q2 2011 and large portion of equipment costs fixed.
The lenders will benefit from a 1st lien on the underlying contracts
and non-leased assets, a cash flow waterfall, a major
maintenance reserve, a 6-month debt service reserve and ring
K2 Solutions's management and staff have extensive experience
in the chlor-alkali and bleach industry.
Key Credit Weaknesses
The DB Contract's low liquidated damage and liability cap,
lack of overall performance guarantees and various exceptions to the guaranteed
maximum price result in limited construction protection.
The lack of an all-encompassing EPC contract creates potential
for conflict between DPR, project and equipment provider especially
if problems arise during construction.
The construction schedule is aggressive which provides little cushion
for delays or problems during construction and several permits will be
outstanding at financial close.
Moody's considers DPR to have speculative grade credit characteristics
and DPR does not have experience in building chlor-alkali plants.
The Project derives approximately half of the revenues under the
base case from the sale of basic chemicals into the wholesale market.
The distribution of bleach in the region is dominated by a few
major entities which could negatively affect the Project's merchant
The industry has experienced significant capacity reductions and
2010 & 2011 are expected to be trough years for the chlor-alkali
The Project's total production capacity is expected to be
a large portion of local and regional consumption.
The Project's cost of raw inputs are generally not correlated
with the wholesale price of end products sold into the wholesale market.
The Dow contracts have various weaknesses including Dow's
ability to terminate the agreement in year 11 subject to a scheduled termination
payment starting at $32.5 million, various penalties
and adjustments for under performance and no explicit penalties on Dow
for non-delivery of raw materials.
The Project could incur inefficiencies at partial operations of
any individual electrolytic cell trains though the ECU facility's
3 electrolytic cell trains provides some flexibility to minimize this
Project has not conducted an environmental site assessment and
Dow's environmental indemnity does not cover indirect costs such
as debt service which indirectly exposes the Project to existing environmental
The Project's location near various fault lines around the
San Francisco area increases earthquake risk while the earthquake insurance
coverage during construction incorporates a large deductible.
Sizeable refinancing risk exists since up to 85% of the
debt could be outstanding at maturity under conservative cases considered
by Moody's though the base case has about 47% outstanding
The stable outlook reflects Moody's expectation that the Project
will achieve full commissioning in the third quarter of 2011, the
Project will be able to meet its performance obligations under the Dow
contracts and the Project will achieve FFO/Debt of at least 6%
and DSCR of at least 1.6 times.
The rating could be negatively affected if the Project incurs significant
delays or cost overruns during construction, the Project is unable
to meet its performance obligations under the Dow contracts, if
the Project is unable to achieve the expected financial metrics including
debt amortization. The rating could also be negatively affected
if a major earthquake occurs near the Project's location and the
Project incurs significant damage.
The rating could be positively affected if the Project reaches full construction
completion according to budget, demonstrates consistently strong
operations and achieves sustained financial performance commensurate with
the base case.
K2 Pittsburg's rating were 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 K2 Pittsburg's core industry
and K2 Pittsburg's ratings are believed to be comparable to those
of other issuers of similar credit risk.
K2 Pittsburg owns and is constructing a chlor-alkali project located
in Pittsburg, CA and is designed to produce up to 296.5 tons
per day of ECUs and up to 200 tons per day of bleach. The Project
is being built by DPR and mechanical completion is expected by April 2011.
Once in operations, the Project will sell approximately half its
output to Dow under a long-term 20-year contract.
The Project is indirectly owned by K2 Pure Solutions (K2 Solutions).
K2 Solutions is indirectly owned by K2 Solutions's management and
Centre Capital Investors IV LP and related parties.
Clifford J Kim
Asst Vice President - Analyst
Project & Infrastructure Finance
Moody's Investors Service
Chee Mee Hu
MD - Project Finance
Project & Infrastructure Finance
Moody's Investors Service
Moody's rates K2 Pure Solutions NoCal's senior debt at B1 with a stable outlook