TEXT-S&P affirms AES Red Oak ratings
April 17 - Overview -- U.S. project finance power generator AES Red Oak LLC has been sold to Energy Capital Partners. -- We are affirming our 'BB-' rating after factoring in the change of ownership. The '2' recovery rating is unchanged. -- The project name is now Red Oak Power LLC. -- The stable outlook reflects Red Oak's improved dispatch levels and improving debt service coverage ratio. Rating Action On April 17, 2012, Standard & Poor's Rating Services affirmed its 'BB-' rating on AES Red Oak LLC's senior secured debt based on the change in ownership to a fund of Energy Capital Partners (ECP) from a subsidiary of AES Corp.. The senior secured debt consists of $384 million senior secured bonds ($224 million 8.54% bonds due 2019 and $160 million 9.2% bonds due 2029). As of March 31, 2012, the outstanding amount on the bonds was $302.6 million (i.e., about $364 per kilowatt ). The outlook is stable. We left unchanged our '2' recovery rating on the debt. The project's name changed to Red Oak Power LLC. Rationale The change in ownership of AES Red Oak does not affect the project's debt rating. The project is a combined-cycle, natural gas-fired generation station in Middlesex County, N.J., with a capacity of 830 megawatts (MW). The project sells its capacity and energy to TAQA Gen X LLC (TGX) under a tolling agreement through 2020 and is thereafter without off-take contracts. We affirmed the project debt rating in January 2012 following a full review. ECP owns several natural gas-fueled power plants in the region of the Red Oak project, and we do not expect to see any adverse change in the operations and maintenance of the plant and likewise no increase in the business risk with a change in ownership. The project company, now Red Oak Power LLC, and its holding company, Red Oak Intermediate Holdings LLC, which owns all equity interest in the project that are pledged to lenders, are both structured to meet Standard & Poor's bankruptcy-remote, single-purpose entity criteria. Liquidity The project has limited liquidity in terms of cash and reserves, typical of project finance. Liquidity buildup is supported by restrictions on distributions if the debt service coverage ratio (DSCR) falls below 1.2x on a 12-month-trailing and forward-looking basis. Further liquidity is available from the subordination of management fees and nondispatch payments to the parent and the subordination of fuel-conversion volume rebate payments to TAQA Gen X LLC. Recovery analysis The recovery rating of '2' indicates substantial (70%-90%) recovery of principal if a default occurs. For more information, see the recovery report published Feb. 10, 2011. Outlook The outlook is stable. We favorably view Red Oak's improved dispatch levels and improving DSCR. A positive outlook and higher ratings would require sustainable DSCR levels in excess of 1.35x, which we view as increasingly possible, given the project's track record over the past year. However, operational challenges in early 2010 hindered the project's financial performance. Negative energy margins, high operating costs, and increasing scheduled principal payments had led to low DSCR levels. Similar operational challenges in the future could hurt ratings if the project's DSCR levels go below 1.0x. Related Criteria And Research -- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007 Ratings List Ratings Affirmed AES Red Oak LLC Senior Secured BB-/Stable Recovery Rating 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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