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
The Rating Outlook is Stable.
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
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
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.
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.
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
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'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Public Power Rating Criteria (pub. 18 May 2015)
Dodd-Frank Rating Information Disclosure Form
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