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 September 10, 2015 - 3:52 PM EDT
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Fitch Affirms Louisiana Energy and Power Authority's Project Rev Bonds at 'A-'; Outlook Stable

Fitch Ratings has affirmed its 'A-' rating on Louisiana Energy and Power Authority's (LEPA) power project revenue bonds (LEPA Unit No. 1), series 2013A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the net revenues of the project, which include payments received from the six project participants pursuant to power sales contracts, payable as an operating expense of their respective utility systems.

KEY RATING DRIVERS

NEW PROJECT OUTPUT CONTRACTED: LEPA has arranged for the entirety of the output from its Unit No. 1 Project (a 64 MW natural gas combined cycle generating facility) to be sold pursuant to take-or-pay contracts with the municipally-owned electric systems, all of which are members of LEPA. The purchasers are obligated to pay for their respective shares of all project costs, including debt service.

SATISFACTORY PURCHASERS; SOME CONCENTRATION: The 'A-' rating reflects the stable credit quality of the underlying Project participants. 74.2% of project output is accounted for by the three largest purchasers: the cities of Houma (LA), Morgan City (LA), and Plaquemine (LA). All three are characterized by a small, but largely residential, customer base and slower growth. Member electric system debt is negligible, but LEPA-related obligations are relatively high (roughly $4,000 per customer).

CONSTRUCTION NEARING COMPLETION: LEPA expects to complete the project later this year with commercial operations scheduled for the first quarter of 2016. Although the project is behind schedule, LEPA's obligations under the engineering, procurement, and construction (EPC) contract are largely fixed and within budget. Importantly, the executed contacts obligate the participants to pay debt service on the bonds regardless of whether the project is completed, operating, or operable.

EFFICIENT GENERATING RESOURCE: The project is expected to provide competitively priced capacity and energy, which will complement LEPA's recent integration into the MISO regional transmission organization and limit participant exposure to market prices. Moreover, the project's proximity to several pipeline systems and access to ample capacity and gas supplies will mitigate the risks associated with volatile fuel costs, which will represent about 75% of ongoing operating costs.

STANDARD CONTRACT STEP-UP PROVISION: The power sales contracts include standard step-up provisions that require each participant to purchase up to 125% of its original allocation of the project output in the event that another participant defaults.

RATING SENSITIVITIES

PARTICIPANT CREDIT QUALITY: The credit quality of the Louisiana Energy and Power Authority's Unit No. 1 project participants, many of which are small in size and somewhat reliant on the cyclical oil and gas sector, will be a key factor in support of the project rating.

PROJECT COMPLETION: The current rating and Outlook reflect Fitch's expectation that the project will be successfully completed. Notwithstanding underlying payment provisions embedded in the power sales contracts, failure to do so would create added financial pressure on the participants, which in turn could place downward rating pressure on the bonds.

CREDIT PROFILE

LEPA is a nonprofit wholesale power supplier that was created in 1979 for the benefit of its members. As of Sept. 1, 2015, LEPA reported 17 members which are dispersed throughout the state of Louisiana. Each of the LEPA members own and operate a municipal electric system. LEPA supplied 1.48 million MWh's of electricity to the members' retail electric customers in 2014.

LEPA is currently pursuing a strategy to supplement the existing resources utilized to supply wholesale power to certain members, which include a 104.6 MW participation in the Rodemacher No. 2 coal-fired plant, federal hydro resources and the assignment of member-owned generation. The project will represent a core component of LEPA's generating portfolio. In particular, the modern, combined-cycle technology will provide the authority with a more efficient baseload resource to replace a portion of older vintage member generation.

SEPARATE AND DISTINCT PROJECT

The project is a natural gas-fired combined cycle generating plant to be constructed in Morgan City, LA. The plant will have a nameplate capacity of 64 MW but is expected to operate at a net output of 61.1 MW based on projected availability. The project is designed to meet the emissions standards in its pending air permit and to comply with all federal and state emissions requirements.

Each of the six participants are required to pay its proportional share of project costs pursuant to power sales contracts which expire the later of (i) the maturity of the bonds or (ii) Oct. 31, 2065. Each participant's obligation is take-or-pay, requiring it to pay its share of all costs (including debt service) whether or not the project is operating or operable. The bond resolution obligates LEPA to set participant rates at a level sufficient to generate minimum 1.10x debt service coverage.

MANAGEABLE CONSTRUCTION RISK

Project construction commenced in early 2014 and is expected to be largely complete by November 18, 2015, approximately six months behind schedule. LEPA expects to begin testing the Unit before year end 2015 and bidding the capacity into the MISO market sometime during the first quarter of 2016. The July 31, 2015 Project Status Review prepared by the EPC Contractor (Robins & Morton) reported that cumulative progress to date was estimated at 93.8%. The necessary electric transmission and pipeline access projects have been completed. LEPA, an experienced operator, plans to operate the plant post completion.

CONCENTRATON AMONG LARGER PARTICIPANTS

Ownership interest in the project is fairly concentrated with the three largest participants (Houma, Plaquemine, and Morgan City) representing about three-quarters of total base capacity. Houma is clearly the anchor participant representing 40.9% of project capacity. The project's capacity will account for varying portions of each system's anticipated peak demand (25% to 44%) and is expected to be a core generating resource for each city given the plant's efficiency.

The participants serve a concentrated economic area focused primarily on oil and gas services. The majority of participants and project load are located in the south central portion of Louisiana. Positively, energy sales are well balanced and have grown at a reasonable pace since 2010. For fiscal 2014, participant energy sales to the more stable and secure residential customer class exceeded 50% of total energy sales for each of the five largest participants.

PARTICIPANT FINANCIAL PERFORMANCE

The project's prospective financial position is supported by the creditworthiness of its participating members, which exhibit strong cash flow; low, if any, leverage; and generally robust cash balances. Fitch has reviewed financial metrics for the five largest participants, and believes that the credit quality of the participants solidly supports the assigned rating.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990644

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990644

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Dennis Pidherny
Managing Director
+1-212-908-0738
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kathy Masterson
Senior Director
+1-512-215-3730
or
Committee Chairperson
Alan Spen
Senior Director
+1-212-908-0594
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com


Source: Business Wire (September 10, 2015 - 3:52 PM EDT)

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