Fitch Affirms East Coast Power, LLC's Senior Secured Notes at 'BBB+';
CHICAGO -- August 16, 2013
Fitch Ratings affirms East Coast Power LLC's (ECP) $318 million ($133.8
million outstanding) senior secured notes due June 2017 at 'BBB+'. The Rating
Outlook is Stable.
KEY RATING DRIVERS
--Stable Contractual Revenues: ECP's cash flows are primarily derived from two
PPAs for the majority of capacity, power, and steam output. The PPAs limit the
project's exposure to dispatch and energy price risks, while the Consolidated
Edison (ConEd) PPA availability credit provision helps minimize the revenue
impact from forced outages. However, the PPA terms expose ECP to up to three
months of tail risk. Fitch believes tail risk is mitigated by the six-month
debt service reserve and potential renewal of the ConEd PPA or sale of
capacity and energy in the merchant market given the competitive, efficient
operating profile of the project. During the PPA period, Fitch estimates that
ECP will earn approximately 5% of its revenues from merchant sales.
Revenue Risk: Midrange
--Strong Operating Profile: The project utilizes conventional and proven
cogeneration technology. ECP is operated by an affiliate of the sponsor and
equipment manufacturer with a financial and reputational incentive to properly
manage the project. This is evidenced by strong historical availability
factors and heat rates, as well as ECP's prompt recovery from the operational
impacts of Hurricane Sandy. The project's PPAs provide for the recovery of
substantially all fuel and O&M costs. Fitch notes that ECP does not maintain
O&M and major maintenance reserves increasing the importance of operational
stability and efficiency. Further, Fitch recognizes the PPAs contain favorable
environmental cost pass-through provisions.
Operating Risk: Midrange
--Minimal Supply Risk: ECP procures its natural gas requirements under
long-term agreements with an investment-grade counterparty mitigating
volumetric risk. Price risk is minimized by the tolling-style PPAs, subject to
heat rates and ConEd's weighted average cost of gas (WACOG) at Linden Venture.
Fitch understands the gas supply contracts expire two months prior to debt
maturity, but believes the competitive and highly liquid nature of the natural
gas market reduces supply risk.
Supply Risk: Stronger
--Conventional Debt Structure: The fixed-rate, fully amortizing debt structure
and provisions that limit additional debt and equity distributions are typical
of similarly rated thermal power projects.
Debt Structure: Midrange
--Investment-grade Financial Metrics: ECP's cash flow available for debt
service has generally outperformed the project's original base case
projections, resulting in considerably higher debt service coverage ratios
(DSCRs). Fitch rating case DSCRs based on low gas prices, as well as
operational stresses, suggest average and minimum coverage of nearly 3x and
above 2x in the final year of the debt term, respectively. Fitch recognizes
that ECP's low outstanding leverage of 1x net debt-to-cash flow available for
debt service and declining debt service profile provide considerable financial
--Operational Challenges: Prolonged decrease in project availability,
persistent heat rate excursions, negative WACOG spreads, or an increased
non-fuel cost profile that materially reduces Fitch rating case DSCRs could
weaken ECP's credit quality.
--Issuance of Additional Debt: The issuance of additional debt that results in
a significantly different DSCR profile may lead to a downgrade.
--Off-taker Rating Action: A change in ConEd's credit rating to a level below
ECP's rating will result in a negative rating action.
Bondholders are secured by a pledge of equity interests in the general and
limited partnerships that hold the Linden facilities and ECP's equity
ownership. Fitch notes that cash distributions from the Linden facilities to
ECP are structurally subordinated to project-level debt service. Currently,
there is no project-level debt outstanding or expected during the debt term.
On Oct. 29, 2012, the project declared force majeure under all significant
contracts due to the effects of Hurricane Sandy. Linden 6 was fully restored
in November 2012, as indicated in the Fitch December 2012 NRAC titled 'Storm
Damage to East Coast Power, LLC Adequately Mitigated'. Meanwhile, Linden
Venture was partially restored to approximately 300MW (vs. 776MW nameplate
capacity) in December 2012 and became fully operational in April 2013.
Management indicated approximately $50 million in repair costs were incurred,
consistent with its initial estimates, due to Hurricane Sandy. All repair
costs beyond the insurance deductible, which was funded with available working
capital, are expected to be reimbursed. Management indicated that the insurer
has been involved throughout the repair process and views reimbursement as a
timing issue. The insurance deductible and repair invoices have been funded
with working capital to-date. Fitch believes management's response in the
aftermath of Hurricane Sandy was efficient and, in conjunction with its
favorable PPA provisions and insurance policy, helped reduce the financial
Additionally, as initially anticipated by Fitch, there was minimal revenue
impact from Hurricane Sandy. This is due to the accumulation of considerable
PPA availability credits that allowed ECP to earn capacity and energy payments
under a force majeure event, in addition to business interruption proceeds.
The project's Fitch-calculated 2012 DSCR of 2.60x was above the Fitch base
case estimate. Going forward, the Fitch base case suggests that DSCRs will
remain above 3.2x between 2013 and 2016 mainly due to the declining debt
ECP owns interests in two gas-fired cogeneration facilities in Linden, New
Jersey. Linden Venture sells up to 645 megawatts of capacity and energy to
Consolidated Edison Company of New York, Inc. (IDR rated 'BBB+' with a Stable
Outlook by Fitch) under a PPA expiring in May 2017 with two five-year
renewals. The project also supplies steam to a Phillips 66 (P66) affiliate
refinery and Infineum USA petrochemical facility. Linden 6 provides steam to
Linden Venture and up to 85 megawatts of electricity to the P66 affiliate
refinery under a PPA expiring April 2017. Fitch notes the Linden 6 PPA was
assigned to P66 prior to the separation of ConocoPhillips' upstream and
downstream businesses in April 2012. General Electric International, Inc. was
retained under a fixed-fee, long-term contract expiring May 2017 to operate,
maintain and provide scheduled maintenance and inspections of the project
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012)
--'Rating Criteria for Thermal Power Projects' (June 17, 2013)
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Thermal Power Projects
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Dino Kritikos, +1-312-368-3150
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Nicole Czarny, +1-212-908-0684
Greg Remec, +1-312-606-2339
Elizabeth Fogerty, New York, +1-212-908-0526
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