TEXT-S&P puts Brooklyn Navy Yard Cogeneration on watch negative
Overview -- We are placing our 'B' senior debt rating on U.S. electricity and steam producer Brooklyn Navy Yard Cogeneration Partners L.P. (BNYCP) on CreditWatch with negative implications. -- The CreditWatch placement reflects our view that the project's liquidity may be pressured and also reflects uncertainty over the extent of physical damage the plant sustained due to hurricane Sandy. -- The recovery rating on the debt is '3', indicating meaningful (50% to 70%) recovery in the event of a default. Rating Action On Nov. 13, 2012, Standard & Poor's Ratings Services placed its 'B' senior secured debt rating on U.S. electricity and steam producer Brooklyn Navy Yard Cogeneration Partners L.P. (BNYCP), on CreditWatch with negative implications. The CreditWatch placement reflects that, while we have not yet received financial information from the project through Sept. 30, the debt service and working capital reserves are backstopped by liquidity facilities that expire Nov. 30. If they are not renewed, the company's cash on hand may be insufficient to make its next principal and interest payment on April 1, 2013. In addition, the plant sustained unspecified damage as part of hurricane Sandy, and we expect that the project will provide an update on future operations as part of a financial disclosure that is pending. The recovery rating on the debt is '3' indicating meaningful recovery (50% to 70%) in the event of a default. Rationale The cogeneration facility sustained damage as a result of hurricane Sandy and is currently not operating. The latest financial report we have is for the second quarter, ended June 30, 2012. The facility closure is likely to exacerbate project historical financial performance we consider to weak . The debt service coverage ratio has been around 1.0x and was expected remain at this level until 2016. We are uncertain of the extent of the damage and the related cost that hurricane Sandy has caused at the facility. Management has indicated that BNYCP has declared force majeure under its power sale and supply agreements. The project is expected to file an insurance claim that is likely to be greater than $5 million, but there could be delays in payments from the insurer. Furthermore, the project will continue to incur demand charges for supply of natural gas and other administrative expenses without receipt of any revenues, including capacity payments, while it is shut. Given the lack of revenue generation for an undetermined amount of time, we expect that cash flow generation and debt service coverages will likely be weaker than previous quarters in the fourth quarter of 2012 and possibly for the first quarter of 2013. BNYCP is a 220 megawatt (MW) to 300 MW gas- and oil-fired cogeneration facility in Brooklyn, N.Y. that can produce up to 1 million pounds of steam per hour. It has a 40-year power and steam purchase agreement (energy sales agreement) with Consolidated Edison Co. of New York Inc. (A-/Stable/A-2) that expires in 2036. The plant began operations in November 1996. Liquidity We are uncertain about the current level of liquidity at BYNCP. Based on the second quarter, ended June 30, 2012, the project had $12 million in unrestricted cash, an undrawn $18 million working capital facility, and a debt service reserve account in the form of letter of credit sized to the maximum remaining semi-annual principal and interest payment ($29.6 million based on the Oct. 1, 2035 debt service payment). The project made a principal and interest payment on Oct. 1, 2012, and we are uncertain as to the project's unrestricted cash position. Both the debt service reserve letter of credit and working capital facility are due on Nov. 30, 2012, and we are uncertain if the project has made any draws and whether the maturity dates have been extended. The project also will be required to make an estimated interest and principal payment of $14 million on April 1, 2013. Recovery analysis The recovery rating of '3' indicates our expectation of a meaningful (50% to 70%) recovery of principal in a payment default scenario. The default scenario assumes that operations remain at historic levels, resulting in about 1x coverage through 2016 but falls to low coverage when annual debt service increases in 2017. Under this scenario, cash would be exhausted, and all liquidity facilities would be fully drawn by 2022, leading to a default. We believe that the project would be reorganized rather than liquidated under the simulated default scenario, because it would generate significant cash flow available for debt service. CreditWatch Standard & Poor's will likely resolve this CreditWatch during the next 30 days as we hope to have a better understanding of the liquidity position at the project and the financial impact of hurricane Sandy on BNYCP, as well as the length of time the facility will remain closed after receiving third quarter financial information at the end of November. Related Criteria And Research Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007 Ratings List CreditWatch Placement To From Brooklyn Navy Yard Cogeneration Partners LP Senior secured debt B/Watch Neg B/Stable Recovery rating 3 3 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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