Crockett Cogeneration, LP -- Moody's upgrades Crockett Cogeneration, LP's senior secured notes to B2 from B3; outlook is stable

Rating Action: Moody's upgrades Crockett Cogeneration, LP's senior secured notes to B2 from B3; outlook is stable

Global Credit Research - 08 Jul 2020

New York, July 08, 2020 -- Moody's Investors Service, ("Moody's") has upgraded Crockett Cogeneration, LP's senior secured notes to B2 from B3. The outlook is stable. These actions conclude the review for upgrade that was initiated on June 16, 2020.

RATINGS RATIONALE

The upgrade to B2 of Crockett Cogeneration, LP's ("Crockett") senior secured notes reflects the July 1st emergence from bankruptcy by Pacific Gas & Electric Company (PG&E) and its parent, PG&E Corporation (Ba2-stable; Corporate Family Rating) as the utility has completed its restructuring process and will assume power purchase agreement (PPA) obligations, including the PPA with Crockett. PG&E's bankruptcy and the risk of PPA rejection in bankruptcy had been the primary risk constraining Crockett's credit quality since the project derives most of its operating cash flow from its PPA with PG&E that expires in 2026. Through the PG&E bankruptcy, the utility remained current on obligations owed to Crockett.

The rating also acknowledges Crockett's historically volatile financial performance that is expected to continue through the term of the debt. When determining the energy revenue component of Crockett's revenues, the market heat rate used is the short-run avoided cost (SRAC), which has increased the volatility of Crockett's cash flow owing to low natural gas prices, variation in hydrology levels and the continued increase in installed renewable electric capacity across California. During 2019, the market heat rate, which helps determine the SRAC price, increased to an average of 8,284 Btu/kwh from 7,310 Btu/kwh in the previous year, leading to an improvement in the debt service coverage ratio (DSCR) being above the 1.20x restricted payment test for the first time in three years. During 2020, the market heat has declined which will likely lower 2020 results relative to 2019.

Crockett also has exposure to greenhouse gas emission costs each year which also reduces annual free cash flow generation. Given the project is able to defer some of its greenhouse gas emission (GHG) costs based on a pre-determined schedule that trues up every third year, in the event the project does not purchase all of the corresponding carbon instruments in the year GHG emissions are incurred, the DSCR on a cash basis could be less than 1.0x, in such true-up year. As of FY 2019 the project had $16.9 million in carbon instrument liabilities associated with FY 2018 and FY 2019 emission costs yet to be purchased during 2020 and 2021. Crockett faces a large payment obligation in 2021 owing to greenhouse gas emission costs which will test the project's ability to manage its liquidit while also managing its exposure to SRAC determined energy prices. Partially mitigating this risk is the fact that the project has locked in the cost of this liability at $17.45/ton for the 2021 delivery year.

Crockett's liquidity remains adequate with a cash funded 6-month debt service reserve fund of $12 million that was previously backed by a $25 million letter of credit facility that was terminated on March 6, 2020 and replaced with cash. In addition to the debt service reserve fund, as of March 31, 2020, the project had $3.7 million in the major maintenance reserve account and unrestricted cash of $7 million.

OUTLOOK

The stable outlook reflects the stable outlook of PG&E, our expectation that the project will continue to operate well and that the project will continue to be able to manage its liquidity in terms of meeting greenhouse gas emission costs each year based upon the assumption that the market heat rate will remain within a range that produces adequate financial metrics and positive free cash flow.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Factors that could lead to an upgrade

Given the ongoing challenges associated with SRAC and GHG liabilities, the project's rating is unlikely to move up at this point. The rating could see upward pressure if Crockett can demonstrate its ability to cover its upcoming large carbon instrument purchases for delivery in 2021, and an abilityto achieve DSCR that approximates 1.10x on a sustained basis based on the project's current contractual arrangements while maintaining strong operating performance.

Factors that could lead to a downgrade

The rating could be downgraded if market heat rates decline again below the 7,000 level on a sustained basis, if there are sustained increases in carbon prices beyond 2021, if the project experiences chronic operating problems that cannot be addressed in a manageable timeframe, or if the DSCR is expected to hover well below 1.0x consistently. Also, Crockett's rating would be negatively affected if PG&E's credit quality were to severely deteriorate or if the project lost its Qualifying Facility (QF) status.

PROFILE

Crockett is a California limited partnership formed in 1986 to own and operate a 240 megawatt natural gas-fired electric power and steam cogeneration facility located at the C&H sugar refinery in Crockett, California. The entire electric output is sold to PG&E under a 30-year Power Purchase Agreement (PPA) that expires in May 2026, and the steam is sold to C&H under a steam sales agreement that expires in 2026. The facility operates as a QF as defined under the Public Utility Regulatory Policies Act of 1978 (PURPA). Consolidated Asset Management Services (CAMS) provides operations and maintenance services.

Crockett is currently indirectly owned by GEPIF NAP I Holdings, LLC (FREIF), who is indirectly owned by an infrastructure fund managed by BlackRock, and 8.27% by Osaka Gas Company, Ltd.

METHODOLOGY

The principal methodology used in this rating was Power Generation Projects published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1106413. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For 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 rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.

This rating is 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

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.

Jennifer Chang Vice President - Senior Analyst Project Finance Group 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 Group 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

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