January 18, 2013 / 10:31 PM / 5 years ago

TEXT-S&P affirms LSP Madison Funding LLC 'BB+' rating

     -- U.S. power generator LSP Madison Funding is proposing to remove two 
key power plants (Doswell and Riverside) from its portfolio and to make other 
changes to the project structure.
     -- The project would pay down debt as required under the lending 
document, but seeks to pay down a lower amount than currently defined, subject 
to required lender approval. The $750 million senior secured term loan would 
be reduced to $475 million.
     -- We are affirming our 'BB+' rating and '2' recovery rating on the debt, 
based on the proposed changes.
     -- The outlook remains stable.

Rating Action
On Jan. 18, 2013, Standard & Poor's Ratings Services affirmed its 'BB+' rating 
on LSP Madison Funding LLC's senior secured term loan, based on a planned 
removal of two key assets and a lower debt pay-down resulting in a new debt 
balance of $475 million. The recovery rating remains at '2', indicating our 
expectation of substantial recovery (70% to 90%) of principal in a default 
scenario. The outlook on the rating is stable.

U.S. project finance entity LSP Madison is planning to remove two assets that 
provide nearly one-half of cash flow, Doswell and Riverside, from its power 
generation portfolio. Based on its credit agreement, in removing the two 
assets, LSP Madison must pay down specified debt amounts on each. For Doswell 
and Riverside, these amounts are $200 million and $220 million, respectively. 
Instead, LSP Madison is proposing to pay down a lower amount, resulting in a 
revised debt balance of $475 million.

With the change to the portfolio, our primary concern is higher debt 
outstanding throughout the term of the loan and weaker financial metrics. 
Compared with the original deal (initial leverage at $209 per kilowatt (kW) 
excluding project debt, and $321/kW including it), in the amended transaction 
leverage would be $258/kW excluding project debt and $384/kW including it. 
Despite the higher debt on a unit basis, we still view overall debt as modest 
and, under our base case, the project pays down the term loan by maturity. 
Compared with the original deal (minimum debt service coverage ratio (DSCR) of 
2.42x and 2013 to 2018 average DSCR of 6.42x), in the proposed transaction, 
the minimum DSCR is 1.98x and for 2013 to 2018 the average DSCR is 4.04x.  

Regarding business risk, we view the portfolio as being weaker with two major 
assets eliminated. However, diversification measures are similar. Compared 
with the current portfolio (3,582 megawatts (MW) of gas-fired and hydro assets 
across diverse markets), the portfolio after the asset removal will total 
1,843 MW. Asset mix remains similar, with about one-third of the portfolio 
combined-cycle gas turbines assets, 60% combustion turbine assets, and the 
remaining a 139 MW hydropower asset in Pennsylvania. Contracted margins are 
also similar, with about 46% of gross margins contracted. With the Doswell 
removal, which had project-debt associated with the asset, encumbered cash 
flow reduces to 13% (from 19% originally). As before, revenue from cleared 
capacity prices, hedges, and power purchase agreements (PPA; 69% of total 
revenues through 2015) provides the primary credit support for the stable 

Two additional developments that support the rating through enhanced cash flow 
are an extension in the Cherokee PPA through 2020 (previously, through June 
2013) and a lower tax distribution cap. In the current deal, the tax 
distribution cap is set at $7.5 million through 2012 and $15 million 
afterward. The revised tax distribution cap is set at $5 million for each of 
2013 and 2014 and zero dollars afterward.

The project's liquidity includes a six-month debt service reserve that is 
backed by a letter of credit (LOC) from LS Power Equity Partner II, and is 
backed by the fund's credit facility. If drawn, repayment of the LOC is an 
obligation of LS Power Equity Partners II and not LSP Madison. A cash-funded 
major maintenance reserve equal to 12 months of major maintenance expenses 
will be put in place and replenished from project cash flow through the life 
of the term loan. Currently, the project has the option to issue a $50 million 
working capital credit facility after close, but this allowance is removed in 
the proposed change to the agreement. 

Recovery analysis
Based on the proposed changes, the recovery rating on the term loan is '2', 
indicating our expectation for substantial (70% to 90%) recovery of principal 
if a payment default occurs. 

The stable rating outlook reflects our expectations that the project's more 
stable revenue streams, consisting of PPAs, hedged power prices, and capacity 
payments, will allow for significant deleveraging over the loan's tenor, even 
if merchant power revenues are weak. A ratings upgrade is unlikely given the 
limited asset diversity, the age of the assets, and the project's exposure to 
merchant power revenue. If the assets underperform operationally, causing 
energy gross margins and capacity payment revenue to fall below expectations, 
we could lower the ratings. We could also lower ratings if we materially lower 
our base-case assumptions, which would affect our expectations of merchant 
revenue. An adverse change to the business profile or developments that would 
lead to greater refinancing risk of over $100/kW or more could well lead to a 

Related Criteria And Research
     -- Standard & Poor's Lowers Its U.S. Natural Gas Price Assumptions; Oil 
Price Assumptions Are Unchanged, April 18, 2012
     -- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007
     -- Criteria for Special-Purpose Entities In Project Finance Transactions, 
Nov. 20, 2000

Ratings List
Rating Affirmed; Recovery Rating Unchanged

LSP Madison Funding LLC
$750 mil sr secd term bank loan       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 

Our Standards:The Thomson Reuters Trust Principles.
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