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Rating Action:

Moody's upgrades Brooklyn Navy Yard to B2 from Caa1; outlook is stable

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).

RATINGS RATIONALE

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 2016.

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 with ConEd.

Outlook

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 necessary.

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.

REGULATORY DISCLOSURES

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 support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure 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 review.

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 the rating.

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
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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