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EIF Channelview Cogeneration, LLC -- Moody's upgrades EIF Channelview's senior secured ratings to Ba1 from Ba3; outlook stable

·16 min read

Rating Action: Moody's upgrades EIF Channelview's senior secured ratings to Ba1 from Ba3; outlook stableGlobal Credit Research - 18 Feb 2022Approximately $123 million of credit facilities affectedNew York, February 18, 2022 -- Moody's Investors Service ("Moody's") has upgraded to Ba1 from Ba3 the rating on EIF Channelview Cogeneration, LLC's (Project) senior secured credit facilities. The facilities consist of a $275 million senior secured term loan B due 2025 (roughly $93 million currently outstanding) and a $30 million revolving credit facility due 2023. The outlook remains stable.Upgrades:..Issuer: EIF Channelview Cogeneration, LLC....Gtd. Senior Secured First Lien Bank Credit Facility, Upgraded to Ba1 from Ba3Outlook Actions:..Issuer: EIF Channelview Cogeneration, LLC....Outlook, Remains StableRATINGS RATIONALEToday's rating action reflects significant debt paydowns at the Project that reduced debt outstanding to $93 million at the end of 2021 relative to $213 million at the end of 2020. Included in this debt paydown is a $105 million repayment during 2021 following strong financial results during Winter Storm Uri. The rating also considers the Project's partially contracted structure as meaningful cash flows come from contractual arrangements for electricity and steam with Equistar Chemicals, LP (Equistar), a subsidiary of LyondellBasell Industries N.V. (Lyondell: Baa2 stable).The Project's energy margins in 2021 were exponentially above budget because power outages and gas supply constraints borne due to Winter Storm Uri pushed power prices in the Electric Reliability Council of Texas (ERCOT, A1 negative) market to the $9,000/MWh market cap for several days. The Project did not experience gas supply problems or material operational disruptions during the storm and benefited from the high prices. As a result, the Project generated a one-time cash flow windfall that was used to repay debt under the terms of the loan's 75% excess cash flow sweep. Current debt outstanding is now 34% of the initial issuance of $275 million, a repayment level that is well below Moody's expectations at the time of the 2019 financing. Also, because of the debt large repayment, refinancing risk is greatly reduced.Moody's views the storm income as a one-time event and expects cash flows to normalize in 2022, particularly in light of moderating power prices in Texas. As such, credit metrics will moderate year-over-year. Moody's projected credit metrics in 2022 forecasts a debt service coverage ratio (DSCR) around 3x, Project CFO/Debt around 40% and Debt/EBITDA around 1.3x. The Project's adjusted credit metrics for the twelve months ended September 30, 2021 reflect the one-time windfall and are very strong, with a debt service coverage (DSCR) of 6.5x, a Project CFO/Debt ratio around 160% and a Debt/EBITDA ratio of 0.55x.The Project's contracts to sell steam and energy to Equistar and the importance of the Equistar Channelview plant in Lyondell's portfolio is a key credit consideration. The Equistar facility is a key Lyondell holding because it is among Lyondell's largest ethylene facilities and is integrated with Lyondell's sizeable Gulf Coast refinery and downstream petrochemical operations. We also understand that Equistar is exploring the possibility of expanding the size of its plant with additional capacity for ethylene and polyethylene polymers. The Project also benefits from hedging arrangements of 333 megawatts (MWs) with Equistar, in addition to other hedging arrangements that total 80 MWs of physical energy hedged between June 2022 and May 2023.The rating is constrained by the Project's position as a merchant generator, which can result in volatile cash flows for the uncontracted portion of its energy sales. Owing to the plant's location in ERCOT, Channelview is largely dependent on the revenues from the sale of energy at market prices in an energy-only market. This is somewhat balanced by the typical project finance protections that includes a trustee administered cash flow waterfall of accounts, a six-month debt service reserve, and a pledge of assets and the sponsor's equity interest in the Project. As previously noted, there is a mandatory cash flow sweep of 75% of excess cash flow after scheduled debt service with a leverage-based step down to 50%.OUTLOOKThe stable outlook reflects the expectations for adequate operating performance as well as strong financial metrics for the 'Ba' rating category owing primarily to the recent debt paydown.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSProspects for further upward ratings movement are limited given the plant's ongoing merchant exposure and the historical volatility in cash flow. That said, an upgrade could occur if an additional substantial debt repayment occurred or if a recontracting event eliminated the Project's merchant cash flow exposure.The rating could come under negative pressure if incremental debt is added to the capital structure such that metrics weakened materially; if the plant experiences major operating problems; or if key contract counterparties experience a severe deterioration in credit quality.PROFILEChannelview owns an 856 MW and 1.9 MM lbs/hr of steam, natural-gas fired, combined-cycle cogeneration facility located in the Houston zone of ERCOT. The Project has been in commercial operation since 2002 and provides an economic and reliable source of high and low-pressure steam and power to the adjacent petrochemical facility, Equistar, a subsidiary of Lyondell, one of the world's largest independent petrochemical companies. The Project also serves the Houston zone of the ERCOT market with baseload power and ancillary services. The Project is indirectly owned by EIF Channelview, LLC (Sponsor). The indirect majority owner of the Sponsor is EIF United States Power Fund IV, a fund managed by Ares' Infrastructure and Power Group.The principal methodology used in these ratings was Power Generation Projects Methodology published in January 2022 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1314542. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Gayle Podurgiel VP-Senior Analyst Project Finance Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 A.J. Sabatelle Associate Managing Director Project Finance JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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