Generation Bridge’s acquisition of power generation assets provides stable cash flow, but regulatory risk remains 

Generation Bridge’s proposed USD 540m loan package is built around a tolling agreement for one of its facilities, which will provide investors with near-term visibility into its capacity payments and cash flow projections, according to eight sources following the deal. But the utility company’s older assets contain regulatory risk that could lead to elevated environmental compliance costs or retirement, the sources added.  

Led by Credit Suisse, the company is marketing a USD 480m TLB due 2028 and a USD 10m TLC due 2028. The TLC will be used for cash collateralized letters of credit. Both loans are talked at Libor+500bps with a 98 OID and 75bps floor. Commitments are due 5 August at 12pm ET.  

The company is also placing a USD 50m revolver due 2026. Proceeds from the deal along with a USD 220m of cash equity contribution by sponsor ArcLight Capital Partners will be used to fund the purchase of eight plants from NRG Energy.  

Generation Bridge agreed to purchase 4,850 MWs of assets from NRG Energy for USD 760m., according to a press release dated 1 March.  

The plants include Arthur Kill, age 56 and Oswego, age 43 in New York, Montville, age 53, Middletown, age 53, Devon, age 26 and CT Jets, age 42 in New England and Sunrise, age 20 and Long Beach, age 14 in California, according to a press release.  

For 2021, leverage is expected to total 3.4x, based on USD 144m of adjusted EBITDA and USD 490m of total debt.  For 2022, leverage is expected to tick down to 2.86x through USD 171m of adjusted EBITDA, as Generation will benefit from fixed capacity payments rather than depending on the volatility of market prices, sources added.  

The Arthur Kill facility will operate under the tolling agreement until 30 April 2025. During this time, Arthur Kill will be responsible for most facility operations and providing contracted output and in turn, the facility will receive fixed monthly capacity payments, equal to roughly 35% of GenBridge’s consolidated gross margins.  

The tolling agreement’s cash flow stream is projected to total roughly 30% to 35% of the project’s overall cash flow through the toll life, according to an S&P ratings report. 

Moody’s estimates that GenBridge’s contracted capacity revenues will represent 64% and 54% of gross margins in 2022 and 2023, respectively, and around 47% in 2024 through 1Q25, considering its assets in California have also entered into forward capacity sales and the assets in Connecticut, Devon and CT Jets, which have cleared their capacity into ISO-NE forward capacity auctions through May 2025. 

Capacity payments are expected to provide the majority of GenBridge’s uncontracted revenue, five of the sources said. While capacity payments ensure near-term cash flow and revenue visibility, the company will be more exposed to a revenue shortfall if capacity prices are depressed, once the tolling agreement ends, sources added. 

On the regulatory side, the power sector overall has encountered changes over the last few years due to climate change and environmental concerns. Tighter emission-control regulations have narrowed the scope of coal-fired generation, while renewable energy mandates and policy-level support have propelled a rise in renewable energy. In reaction, many fossil fuel generating plants are being retired because of more aggressive regulations and the rise of renewable energy plants.  

Specifically, New York, where 70% of GenBridge’s capacity is located, set a goal to achieve 70% clean energy by 2030 and 100% carbon-free electricity by 2040, under the Climate Leadership and Community Protection Act. The state also set a bar to install 9 GW of offshore capacity by 2035, 6 GW of distributed solar capacity and 3 GW of statewide storage capacity by 2030.  

The New York State Department of Environmental Conservation also adopted a “peaker rule” that targets old gas-fired peaker plants by imposing tougher nitrogen oxide emissions requirements during the higher ozone season and facilitates energy storage.  

Although the new regulations are not expected to affect most of GenBridge’s New York facilities immediately, investors are wary that older assets could fall prey to a large amount of environmental compliance costs or retirement, if they are unable to meet the requirements.  

Still on a positive note, investors did point out that GenBridge’s California plants are the youngest, have quick ramp-up capabilities and are stable and compliant with environmental regulations, so they should provide grid reliability for the California market, as the state aims to increase its renewable footprint.  

For relative value, sources compared the company to Helix Generation and Astoria Energy, stating that both should trade tight of GenBridge as GenBridge’s plant portfolio is older.  

At price talk, GenBridge’s loan would offer a 6.51% yield to three-year call, a premium to both Helix and Astoria’s loans, which offer 5.76% and 4.55% yield to three-year calls, respectively. 

Helix’s USD 1.605bn Libor+375bps (1% floor) term loan due 2024 is quoted today at 96.906/97.708, compared to trades at 97.219/98.010 in early July, according to Markit. 

Astoria’s USD 800m Libor+350bps (1% floor) term loan due 2027 is quoted today at 99.609/100.094, compared to trades at 99.792/100.333 in early July, according to Markit. 

From a valuation standpoint, sources also loosely comped the company to Talen Energy Supply and Lightstone Generation, but stated that both those companies are exposed to the PJM market while GenBridge is not.  

Talen’s USD 500m Libor+375bps term loan due 2026 is quoted today in the 91.45/93.1 context, compared to trades at 89.125/91 in early July, according to Markit.  

Lightstone’s USD 1.86bn Libor+375bps term loan due 2024 is quoted today at 77.069/78.181, compared to trades at 77.398/78.795 in early July, according to Markit. 

Messages left with ArcLight and GenBridge were not returned. Credit Suisse declined to comment. 

2021 Debtwire

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