New York, November 15, 2012 -- Moody's Investors Service has upgraded to Ba1 from Ba2 the ratings for NSG Holdings LLC's (NSGH) senior secured notes due 2025, the senior secured term loan due 2014, and the senior secured debt service reserve issued by NSG Holdings, LLC (NSGH). At the same time, Moody's has assigned Ba1 rating to the pari passu senior secured term loan and secured revolver to be issued by NSGH. The rating outlook is stable.
The rating upgrade and rating assignment reflects changes within NSGH's portfolio of projects which have increased the contribution of contracted cash flows through power purchase agreements (PPAs) with investment grade counterparties, with the PPAs' weighted average life of around 12 years exceeding the final maturity of both the term loan and the senior secured notes.
The portfolio changes have occurred primarily from the execution of a long term tolling agreement at the Vandolah plant with Progress Energy Florida (PEF: Baa1 stable), as well as PEF's assumption of capacity under its existing PPAs from the Orlando Plant upon the expiration of the Reedy Creek PPA in 2013, and from the Orange Plant upon the expiration of its PPA with Tampa Electric Company in 2015. The upgrades further acknowledge the debt reduction that has occurred at NSGH following the sale of portfolio assets including Mt. Poso, Front Range and Gilberton, the proceeds of which were used to repay debt.
The rating upgrade further recognizes the increased concentration risk of the portfolio with the Florida assets and PEF following the completion of these sales and the execution of the Vandolah toll. We calculate that collectively four of five PPAs that support the portfolio have PEF as their counterparty representing 95% of the cash flows over the life of the PPAs with the remaining 5% coming from a PPA with lower rated Nevada Power Company (NVP:Baa3 stable).
The rating also considers the potential for volatility in debt service coverage ratio owing to the mismatch that exists between energy payments and fuel costs at three of the Florida plants which could lead to margin erosion. Over the life of the PPAs, these three plants are expected to contribute 77% of the cash flows. Specifically, when natural gas prices are low and coal prices are stable or rising, these plants tend to produce improved operating margins. While we expect natural gas prices to remain low over the intermediate term, the potential volatility that is associated with this fuel source continues particularly given the tenor of the debt. To that end, we estimate that the expected DSCR to approximate 1.9x assuming the current relationship between natural gas and coal remain unchanged.
The Ba1 rating further factors in the flexibility afforded to NSGH to incur additional indebtedness over the life of the notes. We understand that NSGH can incur an additional $100 million of senior secured indebtedness over the life of the notes, and the proposed financing which will add $116 million of senior secured indebtedness to the capital structure is an indication of the sponsor's desire to use this flexibility to re-leverage at some point in the future. The rating also recognizes the modest amount of structural subordination that exists as we understand that approximately $90 million of senior secured amortizing term loan debt issued by Orange Cogen Funding Corporation (Baa3, stable) remains outstanding.
Proceeds from the transaction will be used to used to pay a $109 million dividend, to repay the existing $30 million secured term loan (rated Ba1), and to pay transaction costs. We note that the new term loan features a 100% cash sweep of excess cash flow up to a targeted debt balance resulting in a small remaining refinancing amount, which we believe is quite manageable given the remaining weighted average life of the off-take contracts.
Moody's intends to withdraw the Ba1 on the existing $30 million secured term loan due 2014 (cusip number: 62941NAB7) upon the closing of the new transaction.
NSG Holdings LLC (NSGH), a subsidiary of Northern Star Generation LLC (Northern Star), owns equity interests in eight power generation facilities located in Florida, Nevada, California and Pennsylvania.
Northern Star was formed in 2004 to acquire certain generation assets from El Paso Corporation and is a 50 / 50 joint venture between UBS Northern "C" LLC, indirectly owned by UBS International Infrastructure Fund and OTPPB US Power, LLC, a wholly-owned subsidiary of the Ontario Teachers' Pension Plan Board. The Sponsors are experienced owners of contracted power generation assets in the US market.
The principal methodology used in this rating was Power Generation Projects published in December 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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