Bangkok--27 May--S&P Global Ratings
SAN FRANCISCO (S&P Global Ratings) May 26, 2020—S&P Global Ratings today took the rating actions listed above.
Green Country Energy LLC (GCE) is a 795-megawatt (MW) natural-gas-fired combined cycle power plant in Jenks, Okla. The project began operating in February 2002, and it has a 20-year tolling agreement with Exelon Generation Co. LLC (Exelon) ending February 2022. The project and its holding company are bankruptcy-remote from parent J-Power USA Generation L.P., a joint venture between John Hancock Life Insurance Co. and J-Power North America Holdings Co. Ltd.
Under our revised base-case forecast, we now expect even less cash trapped, resulting in full exhaustion of the DSR. Previously, we had forecast a $626,000 buffer in the untapped about $17 million DSR. We are now forecasting a shortfall of about $7.54 million, after the cash trap account and DSR are exhausted, to make the early redemption payment. If a redemption payment deficit occurred without an alternate liquidity source, the project would default. Although our forecast differs from management's, GCE now expects a shortage of about $4 million, compared to a buffer of $1.38 million previously.
The decline in the projected cash trap account (to $30.4 million from $38.6 million) is due to higher major maintenance and operating expenses in 2019-2021. The unexpected rotor wheel upgrade in 2019 was partly paid with funds in the major maintenance reserve (MMR), which was refunded using money that would otherwise have been directed toward the cash trap in 2020. We expect operations and maintenance (O&M) expenses will be higher in 2020 because of increased maintenance from greater wear on the units, resulting from high dispatch factors and the age of the plant. The cash shortfall would have been higher if not for the $6.3 million of retained cash flow management projects from the November 2021-February 2022 period and which was not previously incorporated in the cash trap estimates. The higher MMR funding resulted in an S&P Global Ratings-calculated debt service coverage ratio (DSCR) of 0.96x in 2019, down from our forecast of 1.24x. Management's DSCR, which excludes funding of the MMR and management fees, was 1.48x, down from its budget of 1.56x. For 2020, we are forecasting a DSCR of 1.17x, compared to management's 1.51x, given the difference in how we treat MMR payments and management fees, as well as other differences in our forecast.
We now rate the project as 'CCC+' because it is vulnerable to a default. Our minimum base-case coverage of 0.13x in 2022 is unchanged because we have not revised our projection of operational cash flows for January and February. Thus, base-case performance remains 'b-', and the downside performance remains 'b'. However, because we are forecasting a default, the rating is consistent with a 'CCC+' credit profile. At this rating level, the 'CCC+' rating is no longer based on project finance criteria.
A project rated 'CCC+' is vulnerable to nonpayment, and it depends upon favorable business, financial, and economic conditions to meet its debt payments. GCE is vulnerable to nonpayment and depends on either a new contract (which we view as unlikely but possible), equity, or outside liquidity to avoid default. The 'CCC+' rating for this project is driven by its unsustainable financial commitments, rather than by the probability of default. This is because the parent has incentives to cover the shortfall rather than lose the asset to lenders over a relatively small sum. The sponsors are investing in maintenance in excess of what would be required to operate the plant to the maturity date. In our view, there is at least 10 years of additional life remaining, suggesting that economic incentives could be sufficient for the sponsors to avoid a default.
Project sponsor J-Power USA has a $25 million working capital facility at its disposal to cover any mandatory redemption shortfall. However, we do not assume any support in our forecast because there is no explicit obligation to support the project.
Our re-contracting assumption is still pivotal. If it occurs, the mandatory redemption would not apply, and the ratings would likely be much stronger. But an early redemption requirement--which under the project's bond indenture was triggered in February 2017 when the project's power contract was not renewed--in the bond indenture effectively forces the project to generate enough cash flows to pay for two years of annual debt service, on top of the principal and interest due.
The negative outlook reflects our view that in the absence of a contract to cover 2022-2024, or another mitigating factor that we would consider certain, the project is vulnerable to default.
We could lower the rating by one notch within the next nine to 12 months if there is no contract or another mitigating factor in place to ensure that all of the outstanding notes will be repaid. We could also lower the rating if we don't think that a reasonable recovery is possible. We could downgrade the project sooner if we forecast a payment default within 12 months, which though unlikely today, could occur if cash flow is significantly reduced by material forced outages, unanticipated maintenance or repairs that reduce capacity payments, increased operating expenses, or higher major maintenance funding requirements.
Because we do not expect a new contract in the next year, we are unlikely to revise the outlook to stable before then. However, we could raise the rating if the project extends the CSA, enters into another contract supported by lenders, favorably changes the terms and conditions of its agreements, or increases the cushion in the DSR (which we view as unlikely, given capacity payments are largely fixed and there are limited opportunities for cost savings). In addition, the sponsor could try to mitigate the shortfall, but we don't assume that this will occur. In all cases, minimum coverage would have to rise to above 1x.