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23 Feb 2017
Approximately $359.2 million of senior secured debt affected
New York, February 23, 2017 -- Moody's Investors Service today upgraded the senior secured debt rating
of Brooklyn Navy Yard Cogeneration Partners L.P. (BNY or
Project) to B2 from Caa1. The rating outlook is stable.
BNY is a 286 MW dual-fuel cogeneration facility located in Brooklyn,
New York. The project sells nearly 100% of its power and
steam output to Consolidated Edison Company of New York (ConEd; A2,
stable) under a long term sales agreement that expires in 2036.
The Project is 100% owned by EIF United States Power Fund IV L.P.
(EIF USPF IV). EIF USPF IV is managed by Ares EIF Management,
LLC (Ares/EIF or Sponsor), a wholly-owned subsidiary of Ares
Management, L. P. (Ares).
The upgrade to B2 reflects our expectations of improving financial performance
and debt service coverage ratios (DSCRs) owing to the expiration of an
above market natural gas transportation contract in November 2016 and
to lower annual debt service requirements following the final repayment
of a previously drawn bank facility in November 2015. The rating
action also reflects the improved operating performance since Ares/EIF
bought the Project and installed NAES Corporation (NAES) and Power Plant
Management Services, LLC (PPMS) as operator and asset manager,
respectively, which should continue to help strengthen credit quality.
BNY negotiated new natural gas transportation agreements with the Transco
and Iroquois pipelines through 2026 and 2021, respectively,
at a lower cost per MMBtu than a previous transportation agreements,
which expired in the fourth quarter 2016. This modification is
expected to result in DSCRs above 1.0x for the first time in several
years, starting in 2018. As discussed below, the DCSR
2017 results will be negatively affected by a planned major maintenance
outage. At the same time, BNY secured two, 2-year
natural gas supply contracts with BP Energy and Tenaska Gas Storage,
which expire on October 31, 2018.
The rating also recognizes the long-term Energy Sales Agreement
(ESA) for electric and steam capacity and delivery with ConEd.
Under the contract, ConEd purchases essentially the entire output
of the facility in the form of steam and electricity. BNY receives
fixed capacity payments for 220 MWs of the plant's electrical generation
capacity. The prices that ConEd pays for delivered steam and electricity
are partially indexed to the NYMEX natural gas price, which is also
the basis for BNY fuel purchases. There are, however,
certain imperfections in the ESA, which prevent the Project from
achieving the kind of stable and predictable cash flows that are more
typically seen with power projects that have long-term contracts
with investment grade offtakers. Specifically, 35%
of the electricity price is indexed to NYMEX, while the remaining
65% is indexed to inflation. As a consequence of this NYMEX
indexation, the plant's electricity sales can be profitable when
natural gas prices are low, though profitability can be eroded in
a high natural gas price environment, where BNY does not receive
full recovery on its fuel cost. On the other hand, steam
sales are generally profitable to the project regardless of the natural
gas price, though Moody's notes that higher natural gas prices generally
lead to more profitable steam sales.
The Project can also experience basis risk due to another imperfection
in the ESA and weather conditions. During cold winter days,
when residential and commercial natural gas use is at its highest,
BNY is susceptible to fuel curtailment by its local gas distributors (LDCs).
While the Project has secured firm gas contracts for delivery to their
city gate, the LDCs reserve the right to curtail the Project for
up to 19 days should there be an emergency or to meet reliability.
When gas interruptions occur, the Project burns fuel oil to generate
steam and electricity. This can result in substantial basis risk,
especially when the price spread between fuel oil and natural gas is large,
as the ESA with ConEd does not pass-through actual fuel oil expense,
but remains indexed to the NYMEX gas price. As a result,
the Project sustains considerable margin reduction under such curtailment
scenarios. The Project experienced a high degree of margin erosion
during the winter of 2013/2014 when historically low temperatures led
to a series of gas interruptions forcing the plant to run on high cost
fuel oil. This winter has seen no comparable effects due primarily
to a mild winter and low oil prices.
The rating also takes into consideration the plant's improved operating
performance. Since purchasing BNY, Ares/EIF has hired an
experienced plant operator, NAES, to provide O&M services
to the Project, and have also contracted with PPMS to provide day-to-day
management, accounting, administrative and other supporting
services to the plant. BNY also signed a long-term service
agreement with Siemens in 2014 to cover parts and services through 2027
(the plant is configured with two Siemens gas turbines and two Siemens
steam turbines). Furthermore, the Project implemented a major
maintenance program that includes a flood control system to prevent the
kind of damage caused by Superstorm Sandy in late 2012, as well
as a 5-year major maintenance cycle for the Siemens gas turbines
and a 7-year cycle for the steam turbines. The next major
maintenance event is expected to occur this year on gas turbine unit 2.
During 2016, BNY maintained strong operational performance with
YTD to September monthly equivalent availability factors in the 98-99%
range. There have been no major forced outage events reported in
Project level liquidity remains weak and a rating constraint. The
Project's $18 million working capital facility expired and was
not renewed, and the $29.6 million debt service reserve
LOC has been utilized with the associated debt obligations being fully
repaid in November 2015. Equity infusions from Ares/EIF helped
facilitate the timely repayment of this obligation.
We understand that BNY has the cash resources that will allow it to cover
debt service in 2017, even though the coverage is forecasted to
be below 1.0x this year, without having to require additional
equity contributions from the Sponsor. Debt service payments for
2017 are due on April 1, and October 1, and total $34.8
million. We believe Ares/EIF remains supportive of this Project
and would continue to support this project if needed, even if they
are not legally obligated to do so, as there is an economic incentive
to do so owing to the expected improvement in financial performance resulting
from the new gas transportation contracts and the long-term ESA
The stable outlook reflects our assumption that the Project has turned
a corner and its financial and operating performance has stabilized.
In addition, the stable rating outlook also considers the involvement
and ownership of the Project by Ares/EIF and Moody's assumptions
that incentives exist for ongoing Sponsor support, should that be
What Could Change the Rating - Up
Positive trends that could lead to an upgrade include an improvement in
Project level liquidity, including the funding of various reserve
accounts, and financial results that demonstrate that the Project
is able to produce DSCR that range between 1.10x -1.20x
on a sustained basis.
What Could Change the Rating - Down
The rating or outlook could come under downward pressure if the Project
continues to produce coverage ratios below 1.0x on a sustained
basis despite the expiration of the high cost natural gas transportation
contract, if Ares/EIF fails to provide capital infusions to the
Project to meet debt service shortfalls, if needed, or should
there were to be an unforeseen sustained forced outage, which would
further impact liquidity.
The principal methodology used in these ratings was Power Generation Projects
published in December 2012. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain 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.
For any affected securities or rated entities receiving direct credit
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to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Richard E. Donner
VP - Senior Credit Officer
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Associate Managing Director
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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