Green Country Energy's Sr Notes Downgraded To 'B+' On Higher Maintenance Costs And Contract Risks; Outlook Negative

  • In May 2018, we stated that unexpected outages or a spike in major maintenance (MM) costs could lead us to downgrade Green Country Energy LLC's (GCE's) debt, since the project was already relying on its debt service reserve (DSR) to meet a mandatory early redemption payment in February 2022.
  • Late last year, the replacement of unit 3's cracked rotor wheel significantly increased MM costs, reducing the project's cash resources by more than we expected.
  • We now forecast that the project will need to draw on $15.4 million of the $16.8 million DSR to meet the 2022 payment, which is about $7 million higher than our previous estimate.
  • We are therefore lowering our rating on GCE's $319 million senior secured notes to 'B+' from 'BB'. The downgrade reflects an increase on the project's reliance on the DSR to meet the redemption. The 'B+' rating reflects our view that there are prospects for the project to re-contract capacity (with lender consent) and avoid the mandatory redemption.
  • The outlook is negative because we believe that if the project's contract isn't renewed, there is insufficient liquidity to offset any further operational issues until February 2022, which would deplete the remainder of projected DSR buffer (about $1.5 million).
  • The recovery rating on the debt remains 1 (90-100%; rounded estimate 95%), indicating our expectation for very high recovery in a default.
SAN FRANCISCO (S&P Global Ratings) May 24, 2019—S&P Global Ratings today took the rating actions listed above.
GCE is a 795 megawatt (MW) natural-gas-fired combined cycle power plant in Jenks, Oklahoma. The project began operations in February 2002 and has a 20-year dependable capacity conversion sale agreement (CSA) with Exelon Generation Co. LLC (Exelon). The project and its holding company are bankruptcy-remote from parent J-Power USA Generation L.P., a joint venture between John Hancock Life Insurance Co. and J-Power North America Holdings Co. Ltd.
  • Predictable contracted cash flows from capacity payments and energy revenues under the 20-year CSA with Exelon, with no fuel supply or power-sale risk over the contract period.
  • Historical operations have mostly been strong, with high plant availability factors supporting capacity and bonus payments.
  • While we do not factor this liquidity into our analysis or our rating, J-Power USA has a $25 million working capital facility it could use to bridge any redemption shortfalls, if needed.
  • The 20-year CSA with Exelon expires in February 2022, two years before the notes mature, posing re-contracting risk.
  • Provisions under the indenture establish an onerous mandatory redemption of $54.8 million (excluding $8.8 million of debt service due just before then) due February 2022 if the parties do not extend or replace the CSA. Forced outage/operational issues last year have increased the project's reliance on its DSR to fund the shortfall between its cash sources and the mandatory redemption amount.
  • Absent re-contracting, which we don't expect to occur before midyear 2020, our rating on the debt stems from the project's ability to operate sufficiently to meet the redemption payment. The CSA does not mitigate operating risk, which exposes noteholders to availability and heat-rate risk.
The downgrade of the debt was triggered by a significant drop in the amount of cash balances we expect will be available to the project when the early redemption payment is due in February 2022. (Under the project' bond indenture, the redemption was triggered in February 2017 when the project's power contract was not renewed). In addition, there's no power purchase agreement (PPA) in the two years before the debt was originally set to mature in 2024. Under our revised base case, lower cash levels than last year will lead to larger drawings on the DSR's letter of credit (LOC) to make the February 2022 balloon payment.
The negative outlook, which we expect will remain on negative for longer than typical, reflects our view that, in the absence of a contract to cover 2022-2024, the shortfall in the cash trap account could increase as a result of lower revenues, higher costs, weaker operational performance, or larger maintenance expenses, given the plant's higher dispatch profile.
We forecast in our base case that the project will have to draw $15.4 million from the DSR in 2022, leaving a slim cushion of around $1.5 million. We forecast a base case minimum DSCR of 1.26x in 2019. We will assess performance in summer 2019 and winter 2019-2020 to determine its impact on the amount of cash trapped, and could take further rating actions then if the DSR balance reduces.
We could lower the rating if there are forced outages, unanticipated maintenance or repairs that reduce capacity payments, increased operating expenses, or higher MM funding requirements. Operational issues leading to a cash trap shortfall of more than $16 million could lead us to lower the rating by at least one notch, or by multiple notches if the reserve is projected to be depleted. In addition, we could lower the rating if minimum coverage ratios fall to the lower end of the 1.2x-1.4x range, for example if MM became sufficiently lumpy.
Since we do not expect a new contract in the next year, we are unlikely to revise the outlook to stable before then. However, we could take a positive rating action if the project extended the CSA or entered into a contract supported by lenders, with minimum coverage staying in the middle of the 1.2x-1.4x range, and the project were able to withstand our 'bb' downside scenario.
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