Nautilus Power LLC 'B+' Senior Secured Term Loan And Credit Facility Ratings Affirmed; Recovery Rating Revised On Upsize


  • We expect a strong operational and financial performance during the life of Nautilus Power LLC's senior secured term loan and revolving credit facilities. The post-refinancing period continues to be the main determinant of our ratings.
  • The project is upsizing its term loan B facility by $55 million to perform a dividend distribution.
  • We are affirming our 'B+' rating on U.S. power project Nautilus Power LLC's senior secured term loan facility and revolving credit facility.
  • At the same time, we are revising the recovery rating on the debt to '3' (50%-70%; rounded estimate: 60%) from '2' (70%-90%; rounded estimate: 70%) as a result of the upsize.
  • The stable outlook reflects our view that debt service coverage ratios (DSCRs) will remain robust in the upcoming 12 months, due to already secured capacity prices and our expectation that the project will continue to capture high on-peak spark spreads. We expect DSCRs to be in the 1.4x-1.6x range, decreasing to about 1.3x after the refinancing.
NEW YORK (S&P Global Ratings) May 17, 2019—S&P Global Ratings today took the rating actions listed above. This project financing comprises an about 2.2 gigawatt power portfolio in the following markets:
Pennsylvania-Jersey-Maryland (PJM)-EMAAC
  • Lakewood Cogeneration L.P.: a 280-megawatt (MW) dual fuel combined cycle facility
  • Essential Power Rock Springs LLC 1, 2, 3, and 4: a 744-MW natural gas-fired peaking facility
  • Essential Power OPP LLC: a 374-MW natural gas-fired peaking facility
Independent System Operator-New England (ISO-NE)
  • Essential Power Newington LLC: a 630-MW dual fuel combined cycle facility
  • Essential Power Massachusetts LLC: A 254-MW portfolio of natural gas, oil, and diesel/kerosene peaking facilities.
  • Portfolio diversification with five independent assets and no single asset accounting for more than 35% of total EBITDA.
  • Diversity of revenue sources and markets; 60% of capacity is installed in PJM-EMAAC, and the remaining 40% in ISO-NE. About 65% of the total gross margin through May 2022 is contracted with capacity payments, providing more cash flow stability in the short and medium term. The reminder is composed of merchant energy revenues and, in a minor proportion, ancillary revenues.
  • A relatively long asset life of the portfolio, which will help the project to refinance its debt with a longer maturity date (we are projecting a refinancing until 2044 under our base case).
  • Exposure to the spot market and long-term uncertainties regarding capacity prices that add to the natural merchant market volatility.
  • Refinancing risk, because the project will need to issue new debt to repay its term loan B by its maturity date in 2024.
We believe cash flow will be highly stable for the next few years,but less certain in the long term due to uncleared capacity prices and merchant market exposure. The project's performance remains robust in the short to medium term, benefiting from already cleared capacity prices until May 2022 (representing over 65% of the total expected gross margin), while it has low mandatory annual debt service (given the nature of the term loan's structure in which an annual 1% is amortized). Therefore, our rating continues to be driven by the post-refinancing period (after the senior secured term loan's maturity). During the post-refinancing period, we model that both the term loan B and the revolving facility are refinanced with a fully amortizing structure due 2044, increasing the mandatory annual debt service compared with the current structure.
The stable outlook reflects our view that DSCRs will remain robust in the upcoming 12 months, driven by already secured capacity prices and our expectation that the project will continue to capture high on-peak spark spreads. We expect DSCRs to be in the 1.4x-1.6x range, dropping to about 1.3x after the refinancing.
If our projected minimum DSCR were to fall below the 1.2x area, this would likely lead to a lower rating. This could stem from operational problems at the plants (low availability levels to capture capacity payments) or sustained weaker-than-expected energy margins. In addition, we could lower the rating if we see that the project does not sweep cash to deleverage as expected.
An upgrade would be possible if our projected minimum DSCR were to improve above 1.6x and that the project successfully swept cash to repay the existing debt, significantly reducing the outstanding debt amount to be refinanced.
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