-- Standard & Poor's is lowering its rating on L.S. Power Funding Corp.'s
$226.49 million ($175.1 million outstanding as of Sept. 30, 2012) senior
secured notes to 'BBB-' from 'BBB'.
-- The lowered rating reflects a debt service coverage ratio (DSCR) at
Cottage Grove LP that has been below 1.4x since 2010 and our expectations that
it will remain below 1.4x on average until debt maturity in 2016. Coverage in
this range is typical of a 'BBB-' rating. Lower energy payments given lower
power prices in the Midwest Independent System Operator (MISO) region and
higher debt service (averaging $22 million at Cottage Grove until 2016 versus
$18.5 million in the preceding five years) are the two main factors
contributing to the lower coverage.
-- The outlook is stable and reflects our view that capacity payments
received are adequate to meet annual amortizing debt payments. While we expect
the capacity factor to improve to around 20%. We forecast DSCR to average
1.35x at Cottage Grove and 1.45x at Whitewater until debt maturity at 2016.
Dec 14 - Standard and Poor's Ratings Services today lowered its rating on
L.S. Power Funding Corp.'s $226.49 million ($175.1 million outstanding as of
Sept. 30, 2012) senior secured notes to 'BBB-' from 'BBB'. The lowered rating
reflects a DSCR at Cottage Grove LP that has been below 1.4x since 2010 and our
expectations that it will remain below 1.4x on average until debt maturity in
2016. Coverage in this range is typical of a 'BBB-' rating.
LS Power Funding is a special-purpose corporation formed to issue the two
series of senior secured bonds in June 1995 and to use the $332 million of
proceeds to purchase first-mortgage bonds from the two projects -- $155
million from Cottage Grove and $177 million from Whitewater. The first
mortgage bond proceeds funded construction of the Cottage Grove and Whitewater
cogeneration projects, which are two 245 megawatt (MW) combined-cycle, natural
gas-fired power plants. The first mortgage bonds secure the senior secured
bonds. The Cottage Grove and Whitewater first mortgage bonds are each secured
separately by the individual projects, with revenue mainly coming from a long
term power purchase agreement (PPA) at each project. The rating on the bonds
is determined by the weaker of the two partnerships because the legal
structure allocates a portion of the debt to each partnership rather than
combining cash flow from both plants to meet a common debt service.
The 'BBB-' rating on LS Power Funding's senior secured bonds reflects the
following credit strengths:
-- Revenue comes from PPAs with stable availability-based capacity
payments that cover debt service and other fixed expenses under most stress
scenarios. The PPAs pass most variable operating expenses through to offtakers
and do not terminate on a loss of qualifying facility (QF) status;
-- Investment grade-rated purchasing utilities are PPA counterparties;
-- The availability history for both plants is high, above 98%.
Availability at Whitewater fell to 85.2% in 2011 because of a forced outage
event. We expect availability to remain above 98% through 2016.
-- Liquidity is adequate, with letters of credit equal to six months of a
debt service reserve. Long term service agreements, with Siemens Energy Inc.,
for each plant provide additional stability of cash flows.
However, the rating also reflects the following credit risks:
-- Continued low power prices could affect energy payments, leading to
lower coverages even though the capacity payments do cover debt service and
fixed operations and maintenance expenses.
-- Outages at Whitewater and Cottage Grove could impact payments as they
are based on availability at the respective plants.
-- Steam supply contracts for Whitewater are subject to renegotiation and
renewal before the senior bonds mature. Steam constitutes only 1% of the
Whitewater plant's revenue.
The two plants are located in Cottage Grove, Minn. and Whitewater, Wis.,
respectively, and began commercial operations in late 1997. Cottage Grove has
a 30-year PPA with Northern States Power Co. (A-/Stable/A-2) and a thermal
sales agreement with 3M Co. (AA-/Stable/A-1+), which both run through October
2027. Whitewater has a 25-year PPA with Wisconsin Electric Power Co. (WEPCO;
A-/Positive/A-2) that runs through May 2022. Whitewater sells steam to the
University of Wisconsin-Whitewater under an agreement that runs through June
2013, with extension options.
We forecast DSCR to average 1.35x at Cottage Grove and 1.45x at Whitewater
until debt maturity at 2016.
The project's operational management changed during July and August 2010, when
North American Energy Services replaced Cogentrix Energy LLC and its operating
subsidiaries. We do not expect this to have a significant effect on operations
in the near term, as most plant staff remained in place.
Restricted and unrestricted cash at Cottage Grove totaled $9.22 million at
Sept. 30, 2012, similar to $8.79 million at Sept. 30, 2011. Restricted and
unrestricted cash at Cottage Grove totaled $1.85 million at Dec. 31, 2011,
down from $3.5 million at Dec. 31, 2010, following debt service payments on
Restricted and unrestricted cash at Whitewater totaled $10.7 million at Sept.
30, 2012, similar to $9.5 million at Sept. 30, 2011. Restricted and
unrestricted cash at Whitewater totaled $4.1 million at Dec. 31, 2011, down
from $3.2 million at Dec. 31, 2010. Very little cash is held at LS Power
The Cottage Grove and Whitewater partnerships must maintain a six month. first
mortgage bond debt service reserve fund equal to the maximum semiannual debt
service in the next 18 months. As of Sept. 30, 2012, these reserves equaled
about $10.5 million and $12 million, respectively. Since 1999, the debt
service reserves have been held by equity owners in exchange for a promissory
note supported by a letter of credit (LOC) from a bank. The current LOCs are
provided by Credit Agricole (A/Negative/A-1) for the EIF Calypso fund (80%)
and by Citibank (A/Negative/A-1) for the EIF Calypso II fund (20%). Both LOCs
expire in Feb 2014. Neither LS Power Funding nor the partnerships are
responsible for repayment of any draws on the LOCs.
Each partnership maintains a credit facility with Credit Agricole that expires
in February 2014. These facilities provide working capital loans of up to $3
million for each of the two partnerships and LOC commitments of up to $5
million for Whitewater, as well as $5.5 million for Cottage Grove. No working
capital loans were outstanding as of Sept. 30, 2012. $500,000 of the LOC
facility for Cottage Grove has remained drawn since before 2006 to secure its
obligations to Northern States Power under the PPA.
Each partnership must maintain a major maintenance reserve funded to $400,000
in the initial year (currently escalated to about $571,000), which it funds in
equal monthly installments throughout the year. Any unused reserve amounts are
returned to the revenue account at the end of each year. The reserve balance
is included in unrestricted cash on the balance sheet.
The distribution test for each of the two partnerships is adequate at the
rating level. It requires a 1.2x debt service coverage ratio for four
quarters, historic and projected. Distributions to cover the partners'
income-tax deficiency are allowed at 1.15x.
Debt service is paid on Dec. 30 and June 30. Total annual debt service
increases fairly steadily by about $1 million to $2 million per year in most
years, from about $30 million in 2002 to about $45 million in 2013, about $44
million in 2014, about $48 million in 2015, and $56 million in 2016. The final
payment is due Dec. 30, 2016. Cottage Grove pays about 47% of debt service on
each payment date, and Whitewater pays about 53%, in proportion to their share
of first mortgage bonds outstanding.
The stable outlook reflects our view that capacity payments received are
adequate to meet annual amortizing debt payments. While we expect the capacity
factor to improve to around 20%, DSCR at Cottage Grove will remain below 1.40x
till 2016, with the exception of 2014 when DSCR is above 1.4x due to the lower
debt payment. We expect coverage levels at Whitewater will also likely be
above 1.40x through the 2016 debt maturity. Low coverage at either partnership
could result in a downgrade because the debt structure does not provide for
high coverage at one partnership to subsidize low coverage at the other.
We could lower the rating if lower availability due to plant outages or a
decline in capacity factor to below 10% lead to a DSCR of below 1.25x until
debt maturity. We could raise the rating if higher capacity factors, along
with high plant efficiencies, lead to a DSCR above 1.40x through 2016.
Related Criteria And Research
"Updated Project Finance Summary Debt Rating Criteria," Sept. 18, 2007
LS Power Funding Corp.
Senior secured notes BBB-/Stable BBB/Negative
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