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Global Credit Research - 21 Jul 2010
New York, July 21, 2010 -- Moody's Investors Service has affirmed the B1 rating on KGen LLC's
senior secured credit facilities and revised the outlook to stable.
The affirmation follows KGen's recent sale of its 640 MW Sandersville
peaking unit to ArcLight for $130 million. While cash flows
are expected to remain negative in FY 2011, the sale has significantly
enhanced KGen's liquidity position. It also supports a collateral
valuation of KGen's remaining assets well in excess of its outstanding
debt, particularly on a net basis. The stable outlook considers
that liquidity should be more than sufficient to cover any shortfalls
in operating cash flows over the next twelve to eighteen months.
The sale price appears to be very favorable for KGen and the sale is not
expected to have a significant impact on the company's cash flows.
In fact, it is actually expected to result in a minor improvement.
The sale values Sandersville at $203/kw, which is well above
the estimated $20 net debt/kw of the company's remaining
assets, all of which are combined cycles units.
A substantial portion of the sale proceeds will eventually be used to
pay down debt. After it has fully funded its reserves, accumulated
a balance of $50 million in its revenue account, and repaid
any draws on its revolver, the company is required to sweep 50%
of excess cash flows to prepay debt, and up to 75% if necessary
for it to achieve its targeted debt balances. Given the limited
debt pay down to-date, Moody's believes the company
would be required to sweep almost 75% of these excess cash flows
in order to achieve its targeted debt balance.
However, the timing of the debt paydown remains uncertain at this
point. While it is permitted to prepay debt at any time,
the company is only required to sweep excess cash flow once a year on
June 30, and it is only permitted to take distributions on that
date. KGen could potentially negotiate with lenders an amendment
to the credit facility that would permit an earlier distribution provided
that at the same time it sweeps as much of the proceeds to prepay debt
as it would do if it were occurring on June 30, though it has not
yet announced any plans to do so. Strict limits on investments,
acquisitions, and capital improvements should help to ensure that
the asset proceeds will remain available to pay down debt on June 30,
2011 if the negotiations are unsuccessful.
Notwithstanding a slight improvement attributable to the sale, cash
flows are expected to remain negative this year. Even if the sales
proceeds are applied towards paying down the debt in a timely manner as
discussed above and the company realizes a reduction in 2011 interest
expense as a result, it expects to have a $700,000
cash flow shortfall. If the sale proceeds are not applied to paying
down debt until next June 30, the shortfall would be $2.6
million. (If it were not for the asset sale, the cash flow
shortfall was projected to have been $6.5 million.)
Regardless, the company has ample unrestricted cash with which to
cover the operating cash flow shortfall.
The company's power sales agreement with Georgia Power, which
contributes from 60%-70% of its gross margins,
is scheduled to expire in May of 2012. If this agreement is not
renewed or replaced on favorable terms, or if market conditions
do not improve significantly, the company faces a significant decline
in cash flows when the current agreement expires, which could put
downward pressure on the rating. However, the rating could
be preserved if the company successfully executes another asset sale that
enables it to repay a meaningful portion of its remaining debt.
Given the expiration of the Georgia Power PPA, the rating is unlikely
to be upgraded in the near to medium term.
The last rating action on KGen occurred on April 23, 2009 when the
B1 rating was confirmed and the outlook was revised to negative.
The principal methodology used in rating this issuer was Moody's Power
Generation Projects, published in December 2008 and available on
www.moodys.com in the Ratings Methodologies subdirectory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Ratings Methodologies subdirectory on Moody's website.
Based in Houston, Texas, KGen is a power generating company
formed in 2004 as a vehicle to purchase and hold a portfolio of power
generation assets from Duke Energy. KGen currently owns a portfolio
of four combined cycle gas fired generating plants serving the Entergy,
Southern, and TVA subregions of SERC, with a total capacity
of 2,390 MWs. One of the plants comprising approximately
25% of the total capacity is under contract with Georgia Power
(senior unsecured debt rated A2 under review for possible downgrade) until
2012. The other plants are completely merchant. The project
benefits from very low leverage relative to similar power projects rated
by Moody's located in other parts of the country. However,
this is not sufficient to mitigate its significant merchant exposure and
the generally unfavorable nature of the SERC market, which is the
least deregulated wholesale energy market in the country and is characterized
by significant market power exercised by the load serving entities,
a lack of transparency and liquidity, and an excess of gas-fired
Chee Mee Hu
MD - Project Finance
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Moody's revises KGen outlook to stable
No Related Data.
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