Approximately $750 million of senior secured credit facilities rated
New York, April 25, 2011 -- Moody's Investors Service assigned a Ba3 rating to Star West Generation
LLC's (Star West or the Company) proposed $750 million credit
facilities consisting of a $650 million senior secured 7-year
term loan facility and a $100 million 5-year senior secured
revolving credit facility. Star West is a newly created entity
formed to acquire LS Power's ownership interest in the Griffith
and Arlington Valley projects in Arizona and is an indirect subsidiary
of Highstar Capital IV and its affiliates, a private equity fund
managed by Highstar Capital. The rating outlook is stable.
The Ba3 rating is driven by the highly contracted nature of Star West's
operations; the majority of the Company's gross margins will
be derived from contracts with investor owned utilities, that generally
extend through the term of the debt. The stability provided by
the contracts works to offset Star West's sizeable debt burden which
is evidenced by cash flow to debt metrics that are consistent with rating
factor scores in the low B ranges indicated in Moody's Rating Methodology
for Power Generation Projects (the Methodology). For at least the
first several years of the financing, cash flow to debt is expected
to remain in the neighborhood of 5% in the sponsor's base
case, and to be lower in Moody's sensitivity cases.
The potential for improvement in later years is dependent upon a strengthening
of market conditions and operating profile.
The rating considers the efficiency proven technology and design of the
projects which should position them well as the economies in Arizona and
Nevada resume modest growth, although recently the plants have been
run almost exclusively during the contracted periods. We expect
Star West will be able to meet its required debt service obligations with
a modest cushion even if the plants continue to run only during the summer
months (under this assumption minimum debt service coverage ratios are
projected in the range of 1.1-1.2 times).
In this downside scenario, we estimate that approximately 70%
of the term loan balance or approximately $400 per kW would be
outstanding at maturity.
The 577 MW Arlington Valley facility is located approximately 50 miles
southwest of Phoenix and is connected to the Palo Verde pricing hub.
During the summer months 560 MWs of the project's capacity is sold
to an investment grade investor owned regulated utility under a tolling
agreement that extends to 2019. The 570 MW Griffith plant is located
in Kingman, Arizona, near the Mead pricing hub and has a summer
month tolling agreement with Nevada Power Company (NPC: Ba2 senior
unsecured) that extends through 2017. Griffith also has a separate
25 MW capacity contract with an Arizona-based electric cooperative
(not rated), the obligations of which Star West expects it would
meet with market purchases if called.
Proceeds from the $650 million term loan, along with $300
million of equity capital (comprised of $250 million from Highstar
Capital IV and its affiliates and approximately $50 million of
third party financing provided to Star West's indirect parent) will
be utilized to fund the purchase price, a maintenance reserve of
$5 million, and the payment of fees and expenses.
Up to $80 million of Star West's $100 million revolving
credit facility may be used for letters of credit. Initially approximately
$55 million of this facility will be utilized to post collateral
for contractual obligations, approximately $23 million will
be utilized to provide Star West's six month debt service reserve
letter of credit, and approximately $22 million will remain
available for working capital needs.
Key factor supporting the rating are:
In the sponsor's base case scenario, approximately
74% of the Company's gross margins are expected to be provided
by its tolling agreements. While the Griffith tolling agreement
expires one year prior to the term loan maturity, the Arlington
Valley contract will remain in place for two summer peaking periods beyond
the term of the loan.
Both projects have maintained high availability factors during
their summer tolling months. Griffith's tolling period availability
has averaged above 99% since 2008 while Arlington Valley's
availability has averaged above 98%, which satisfy the required
availability factors under their respective tolling agreements.
The Company's holdings are diversified across two projects
that are geographically separated within Arizona and have different off-takers.
Contributions to gross margin are approximately equally divided between
the two assets.
Dividends are restricted via a cash flow sweep mechanism that requires
100% of excess cash be utilized to repay debt. The sweep
percentage may be adjusted to 85% or 70% in the event that
within 90 days of closing additional equity is contributed and the amount
of the term loan outstanding is reduced below $600 million or $550
Excess cash flows will be swept on an annual basis in June of each
year. This is intended to ensure that the projects retain sufficient
liquidity to address working capital or maintenance expenditures as these
needs will tend to be greatest in the non-tolling shoulder spring
and fall months whereas the projects will generate the bulk of their cash
during the summer tolling period. This liquidity feature helps
to offset the lack of a cash funded debt service reserve and the limited
look forward requirement on the maintenance reserve.
There will be a major maintenance reserve, initially funded
at $5 million which will be maintained at an amount equal to at
least the next three months' planned major maintenance expenditures
with the ability to reserve up to the next twelve months of major maintenance.
The reserve will be funded quarterly. There will also be a six
month debt service reserve which can be funded either with cash or a letter
of credit. The Company expects to fund this intially with a letter
of credit under the revolver.
Each project benefits from a long term services agreement (LTSA)
with GE, the gas turbine manufacturer, which covers major
overhauls and inspections of the gas turbines. This arrangement
mitigates the cost risk associated with major maintenance for both projects
and also results in some smoothing of major expenditures. The LTSAs
require the projects to post collateral. These obligations will
be met with letters of credit from the Star West credit facility.
O&M services are provided by NAES, a well known third
The project financing structure includes features such as:
a first lien security package including underlying assets, contracts,
accounts and equity interests; limitations on additional debt;
prohibitions on sale of assets; downstream guarantees from operating
companies and upstream guarantees from Star West's direct parent;
a trustee administered cash flow waterfall; dividend restrictions;
and a cash flow sweep for the repayment of debt.
The above factors are balanced against the following credit challenges:
The Projects are mid-merit assets which have historically
run almost exclusively during their summer contracted months. The
average capacity factor over the past three years for Griffith was approximately
33%; for Arlington Valley it was about 20%.
Going forward, the sponsor's anticipate the plants annual
capacity factors will be in the range of 60-70%.
Cash flow metrics correspond to the 'B' or "Caa"
categories under the Methodology. Over the first three years of
the financing, under various conservative cases considered by Moody's,
the average FFO/Debt ratio is below 5% while over the term of the
debt the average ratios are in the range of 8% to 10%.
These metrics compare to about 6.5% and over 18%
in the sponsor's base case. Debt service coverage ratios
in Moody's cases average about 1.3x to 1.4x in the
first three years versus 1.65x in the sponsor's base case.
Over the life of the term loan, Moody's scenarios produced
average debt service coverage ratios in the range of 1.5x to 2.0x
compared with approximately 2.5x in the sponsor's case.
The amount of the term loan that will need to be refinanced at
maturity will vary depending on market conditions and the extent to which
the plants are able to operate economically. Under Star West's
base case, refinancing risk is expected to be limited with approximately
32% of the original outstanding balance (approximately $180
kW) outstanding at the maturity of the term loan. Under more conservative
cases considered by Moody's, approximately 50% of the
term loan balance would remain outstanding. In a more stringent
scenario where the projects continue to operate only during their contract
periods, approximately 70% of the original debt balance would
remain at the maturity of the term loan.
There will be a six month reserve for interest and required principal;
however, the reserve is expected to be funded via a letter of credit
written off of Star West's $100 million five-year
revolving credit facility. Moody's views this as providing
significantly less protection to the lenders than a cash funded debt service
As is true of all power projects, Star West's financial
performance, cash flow and credit metrics are sensitive to higher
operating costs, operating heat rates and realized merchant energy
and capacity margins.
Although some maintenance spending is smoothed via the payment
scheme of the long term service agreements, major outages will still
require about 65% of the costs to be paid around the time of the
Star West's stable outlook reflects the highly contracted nature
of the company's cash flows and our expectation that the operational
issues facing the plants have been largely addressed. The stable
outlook assumes the projects will be operated on an economic basis so
that there is likely to be some increase in plant capacity factors.
The outlook assumes Highstar IV and its affiliates will be successful
in raising additional equity funds such that the $50 million in
third party financing provided to Star West's indirect parent is
repaid as anticipated over the near-to-medium term.
In Moody's view the rating is well placed and has limited prospects
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 repayment, additional contracts that maintain or improve cash
flow, and sustained cash flow credit metrics solidly in the 'Ba'
category under the Methodology.
There could be downward pressure on the rating or outlook if there were
to be a deterioration in the credit quality of either tolling agreement
off-taker, if the projects do not operate as anticipated,
if cash flow credit metrics or debt amortization are materially lower
than anticipated, or if the $50 million in third party financing
provided to Star West's indirect parent is not repaid as generally anticipated.
The ratings are predicated upon final documentation in accordance with
Moody's current understanding of the transaction and final debt sizing
and model outputs consistent with initially projected credit metrics and
Star West is a wholly owned subsidiary of private equity funds managed
by Highstar Capital IV and its affilliates which, after closing,
will own two gas fired combined cycle power projects totaling approximately
1,147 MW. The 577 MW Arlington Valley project and the 570
MW Griffith project are both located in Arizona. Arlington Valley
has a summer month tolling agreement with an investment grade investor
owned regulated utility utility while Griffith has a summer month tolling
agreement with NPC and a separate 25 MW contract with an Arizona based
electric cooperative. Highstar Capital is an independently owned
and operated private equity fund manager with over $5 billion invested
across 18 platform investments since its inception in 1998. Highstar
Capital focuses its investments in the energy, environmental services
and transportation sectors.
The principal methodology used in this rating was Power Generation Projects
Industry Methodology, published in December 2008.
Information sources used to prepare the credit 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
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a credit rating.
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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 Star West Generation's secured credit facilities Ba3, outlook stable
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