Fitch Affirms Astoria Power Project Trust's Series A, B, and C Certificates; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings for Astoria Power Project Pass-Through Trust's series A, B, and C certificates as follows:

--$515 million series A certificates due 2016 at 'BBB-';

--$210 million series B certificates due 2021 at 'BB';

--$69.5 million series C certificates due 2021 at 'BB-'.

The Rating Outlook is Stable for each series.

Astoria Power Project Pass-through Trust was formed to issue the certificates. The proceeds were used to purchase the rights, titles, and interests of Astoria's lender in Astoria Energy LLC's (the project) first and second lien loans and corresponding collateral. Each of the certificates represents a fractional interest in the trust.

KEY RATING DRIVERS:

--Contracted Price Floor: The power purchase agreement (PPA) with an investment-grade off-taker provides for a capacity and energy price floor that supports the payment of scheduled debt service. Fitch expects the project to rely on the capacity and energy price floor for the next two to four years. The price floor reduces revenue risk, but cash flow remains subject to the risk of operational shortfalls or increased costs, potentially exacerbated by an unfunded operating reserve.

--Manageable Refinance Risk: Astoria's debt structure provides financial flexibility by enabling the project to defer first lien target amortization and pay second lien debt service in-kind. Fitch believes that average New York Independent System Operator's (NYISO) Zone J capacity and energy prices will generally remain below the PPA price floor requiring the project to refinance approximately $75 million of the target amortization portion of the first lien loan. Additionally, the off-taker's decision to not extend the PPA through the maturity of the second lien loan creates revenue uncertainty that increases refinance risk.

--Strong Competitive Position: Astoria has a strong competitive position in the NYISO Zone J, historically among the most capacity constrained markets in the U.S. This helps mitigate dispatch risk and enhances capacity and energy price prospects during the merchant period.

--Solid Cost Profile: Management has effectively managed costs and realized approximately $7 million in shared cost-savings with Astoria II. The PPA does not pass-through operating or emissions costs, and energy purchases are subject to an implied heat rate factor, increasing the importance of operational stability and efficiency.

--Adequate Projected Coverage Ratios: The Fitch rating case forecasts scheduled series A, B, and C debt service coverage ratios (DSCRs) of approximately 1.45x, 1.15x, and 1.05x (respectively) through the PPA period. The Fitch base case forecasts a similar DSCR profile due to forecasted depressed market capacity and energy prices that lead to the payment of PPA floor prices over the next two to four years. Fitch expects more robust coverage in the Fitch base and rating cases thereafter from a forecasted recovery in market prices, an assumed long-term refinancing of any outstanding first lien balance and manageable leverage of $525 per kW or 2.5x net debt-to-CFADS at the commencement of the merchant period.

WHAT COULD TRIGGER A RATING ACTION

--Operational Challenges: Decreased project availability, persistent heat rate excursions, or an inability to effectively manage operating costs;

--Depressed Market Prices: Sustained weakness in the capacity and energy markets.

SECURITY

Astoria Depositor Corp. deposited with the trust a first and second lien loan executed by Astoria Energy LLC. The loans are secured by a first or second priority mortgage lien on the real estate, security interest in all of Astoria's personal property, including the PPA and other contracts, and a pledge of all accounts and the membership interests of Astoria Project Partners LLC in the project.

Fitch views the credit quality of the series A certificates and series B certificates to be closely aligned to the credit quality of the first and second lien loans, respectively. Fitch considers the series C certificates to be structurally subordinated to the series A and B certificates given their position in the waterfall and lower priority in the event of foreclosure. Additionally, Fitch notes that the lien priorities will remain intact until full cash payment of the first lien principal and interest. This includes the commencement of a new first lien credit agreement.

CREDIT SUMMARY

Fitch believes the project will receive capacity and energy prices consistent with the contracted price floor for the next two to four years due to continued market pricing weakness. While energy prices have primarily been driven by low natural gas prices and demand, NYISO Zone J capacity prices have declined considerably by the entry of uneconomic capacity. However, Fitch views the FERC ruling on the NYISO application of the buyer-side market power rules for Astoria II and Bayonne as favorable to market capacity prices in the long-term. Nevertheless, uncertain future load demand and a response by mothballed capacity may act as a capacity price suppressant. Fitch expects the price floor to continue supporting scheduled debt service and near-term financial flexibility to remain constrained, but any capacity and energy margin improvements should help reduce refinance risk.

Fitch recognizes that the structural features of the debt allow for market pricing improvements to benefit the debt holders, as the project may not make equity distributions until all targeted payments are met and debt service reserves are fully funded. Fitch notes that the project's reserves were drawn on during the first half of 2012 due to timing issues, but have been or are in the process of being replenished. Fitch believes that the floor pricing structure and projected price recovery, in conjunction with the structural features of the debt, reduce the probability of default and help mitigate the projected refinance risk.

Astoria is an approximate 550MW gas- and USLD-fired power plant in the Astoria section of Queens, New York. The facility provides electric generating capacity for NYISO's Zone J, which consists of the New York City market. Astoria sells the majority of its capacity and energy to Consolidated Edison (ConEd; Fitch rated 'BBB+' with a Stable Outlook) under a PPA for an initial term of 10-years, expiring May 2016. Fitch notes that ConEd decided not to extend the PPA for an additional five-year period through May 2021. The rate structure for the capacity and energy components is priced at a 5% discount from the then-current market price, which is subject to a floor capacity and energy price, and a capacity ceiling price.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Thermal Power Projects' (June 18, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Thermal Power Projects

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681297

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Contacts

Fitch Ratings
Primary Analyst:
Dino Kritikos, +1-312-368-3150
Associate Director
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Cynthia Howells, +1-212-908-0685
Director
or
Committee Chairperson:
Greg Remec, +1-312-606-2339
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Dino Kritikos, +1-312-368-3150
Associate Director
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Cynthia Howells, +1-212-908-0685
Director
or
Committee Chairperson:
Greg Remec, +1-312-606-2339
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com