December 3, 2004
Source: Fitch Ratings CHICAGO--(BUSINESS
WIRE)--Dec. 3, 2004--Fitch Ratings expects to
assign a 'BBB-' rating to Juniper Generation,
LLC's (Juniper) proposed issuance of $203.5
million senior secured notes due 2014. Juniper
is indirectly owned by ArcLight Energy Partners
Fund II, L.P. (AEPF II) and Delta Power Company,
LLC (Delta). AEPF II was formed in 2004 as the
second fund sponsored by ArcLight Capital
Partners, LLC to provide private equity capital
for investments in the global energy and power
industries. Delta, an independent power producer
formed in 1997, owns interests in and manages
generation facilities throughout the U.S. After
paying transaction costs, the net proceeds from
the offering will be used to retire outstanding
debt at Juniper, pay down approximately $70
million of project-level indebtedness, pay
transaction expenses, and provide an equity
distribution to the sponsors.
Juniper's bondholders will rely solely on the
equity distributions from a portfolio of nine
gas-fired cogeneration plants located in
southern California and the fees earned by two
wholly owned service companies. Juniper's
ownership interests in the portfolio are
equivalent to 298 MW of net capacity. Each of
the generating plants is a qualifying facility
under federal PURPA legislation, obligating the
local utility to purchase the plant's output at
prices established by the California Public
Utilities Commission. The output from eight of
the plants is sold under long-term power
purchase agreements (PPAs) with Pacific Gas and
Electric (PG&E, indicative senior unsecured
rating of 'BBB+') and the output from the
remaining plant is sold under a long-term PPA
with Southern California Edison (SCE, senior
unsecured notes rated 'BBB' by Fitch). Under
the PPAs, the projects receive fixed capacity
payments subject to certain minimum availability
requirements. Contractual energy payments are
calculated using the counterparties' short-run
avoided cost (SRAC), which is normally based on
the price of natural gas at the Malin Hub. Until
July 2006, the settlement agreements between
Juniper and PG&E fix SRAC at 5.37 cents/kWh for
eight of the projects. For the remaining
facility, a settlement agreement with SCE bases
SRAC on the natural gas price at the Topock Hub.
After July 2006, the SRAC received by each
project will reflect the prevailing SRAC
calculation.
The service companies perform operations and
maintenance (O&M) at all of the plants and fuel
procurement at eight of the plants. Juniper and
the service companies have no employees. The O&M
staff at the facilities is employed by an
affiliate of Delta, and Delta personnel also
provide gas procurement and general management
services.
Rating Rationale
Fitch has evaluated Juniper's credit quality on
a stand-alone basis, independent of the credit
quality of its owners. The assigned rating
reflects Juniper's expected financial
performance and the underlying portfolio asset
mix over the term of the notes. Financial
performance is based on the receipt of
contractual revenues, which are driven by
facility availability and the counterparties'
SRAC after July 2006.
The counterparty rating of PG&E could constrain
the rating of Juniper, as the projects rely
primarily upon PG&E as a source of revenue. Over
80% of Juniper's cash flow is ultimately sourced
from PG&E. This constraint is not currently
active; PG&E's counterparty rating exceeds
Juniper's expected rating, which reflects
Juniper's credit quality on a stand-alone basis.
However, in the event PG&E's rating falls below
Juniper's stand-alone rating, it is likely that
the rating on Juniper's notes will be downgraded
accordingly.
Primary Credit Strengths
- The facilities have achieved a track
record of solid operational performance
using proven technology.
- Fixed capacity payments and contractual
service fees earned by the operating
companies provide Juniper with stable cash
flows.
- Juniper benefits from a broad portfolio
of projects for an extended period of time,
reducing the likelihood that operational
difficulties at any one facility will
threaten Juniper's ability to pay debt
service.
- Juniper has established a record of
stable and predictable operating costs.
Primary Credit Concerns
After July 2006, a change to the SRAC
formula could potentially produce a mismatch
between energy payments and Juniper's actual
cost of natural gas.
Fitch's review of Juniper's financial
performance focuses on Juniper's ability to
make timely payments of interest and
principal. In the Fitch base case, projected
debt service coverage ratios average 1.5
times (x) and range between 1.4x and 1.55x.
The base case employs Fitch's natural gas
pricing assumptions for the Malin Hub and
treats certain subordinated expenses as
operating expenses paid before debt service.
The subordination of these expenses provides
additional coverage of approximately 0.1x
for a temporary cash shortfall.
Fitch's analysis includes stress scenarios
that incorporate a range of natural gas
pricing assumptions, including a low gas
price scenario and a scenario that assumes a
wider basis differential between the price
of natural gas at the Malin Hub and the
facilities' delivery point for natural gas.
Absent a modification of the SRAC formula,
natural gas price risk is viewed as minimal.
The natural gas sensitivities indicate that
Juniper can withstand large fluctuations in
natural gas prices, as financial performance
falls by less than 0.1x versus the Fitch
base case in each scenario. Fitch believes
that the current SRAC formula provides a
natural hedge between the price received for
energy and Juniper's actual cost of natural
gas, protecting Juniper from a prolonged or
severe decline in natural gas prices.
Other sensitivities include reduced
availability, high heat rates, increased
operating expenses and high inflation. The
magnitude of the decline in financial
performance compared to the Fitch base case
is approximately 0.1x in each scenario.
These non-gas sensitivities are viewed as
highly unlikely and have an impact on
financial performance that is acceptable at
the investment-grade rating level.
Fitch has published a presale report with a
detailed discussion of the transaction and
rating rationale. The presale report
'Juniper Generation LLC' is available on the
Fitch Ratings web site at
www.fitchratings.com in the 'Project
Finance' category under the 'Corporate
Finance' sector.
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Contact:
Fitch Ratings
Christopher R. Joassin, 312-368-3166 or
Doug Harvin, 312-368-3120, Chicago
or
Media Relations:
Brian Bertsch, 212-908-0549, New York
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Source: Fitch Ratings |
