Fitch Affirms Pennsylvania Econ Development Fin Auth (The Colver Project) at 'BB'; Outlook Stable
Fitch Ratings has affirmed the rating on the Pennsylvania Economic
Development Financing Authority's (the Colver Project) approximately
$53.4 million in 2005 series F resource recovery revenue refunding bonds
due 2018 at 'BB'. The Rating Outlook is Stable.
The affirmation reflects the fixed-revenue nature of the asset under the
power purchase agreement (PPA) that extends about a year and a half
beyond the maturity of the debt in 2018. This aging waste coal facility
will continue to face the risk of increased maintenance, reduced output
and low energy price growth tied to lower than expected GDP growth over
the remaining debt tenor. While projected debt service coverage is
expected to remain near breakeven levels, Colver's strong liquidity is
sufficient to cover a full year's debt service and support the rating at
the 'BB' level.
KEY RATING DRIVERS
Contractual Revenues Reliant on Strong Operations - Revenue Risk:
The project relies on the ability of the operator to maintain high
availability and capacity factors in order to maximize variable payments
under the PPA, capture the benefit of excess energy sold at the
locational marginal price (LMP) and provide revenue stability. LMP
sales, despite price variability and small percentage relative to total
revenues, help to add cushion to the cash flow profile. As the PPA
expires in May 2020, the project benefits from an estimated 18 month
tail to generate additional contracted cash flow after debt maturity.
Operating Margin Subject to Cost Control - Operating Risk: Weaker
The project remains exposed to price fluctuations in commodities,
uncertain emissions compliance costs and persistent maintenance
challenges. Colver is meeting the Cross State Air Pollution Rule (CSAPR)
requirements. A recently approved deferral to comply with Mercury Air
Toxic Standards (MATS) standards after debt maturity provides near-term
cash flow relief.
Adequate Coal Supply - Supply Risk: Midrange
Despite 75% of waste coal under contract through debt maturity, the
project is susceptible to potential price swings in the remaining 25% of
spot coal supply. The relative liquidity and depth of the waste coal
market helps to mitigate this risk over the remaining debt tenor.
Increased use of opportunity coal has also mitigated cost risk.
Debt Structure Supports Cash Flow - Debt Structure: Midrange
The debt structure is typical for project finance as it is fixed rate
and fully amortizes in 2018. The short tenor mitigates exposure to
longer term operating risks. The available liquidity bolsters cash flows
against periods of production shortfalls or increased operating costs
over the next three years.
Uncertain Financial Profile
Under a modest stress scenario which combines flat revenues and a 5%
operating expense increase, Fitch projects near-term debt service
coverage ratios (DSCR) to average 1.31x with a minimum of 1.00x. While
these coverage levels may suggest a lower rating under Fitch's criteria
for fully contracted thermal power projects, the stable operating
history near-term debt maturity and considerable liquidity support the
rating at the current level.
Peer Comparison: Colver and Choctaw (series 1 rated 'B', series 2 rated
'B-'/Outlook Stable) face operating performance challenges typical for
coal facilities, though Colver has a longer history of established
operating performance. With at least 16 years remaining to debt
maturity, Choctaw is exposed to longer term risks of variability in
plant performance and potential exposure to merchant revenues and lacks
liquidity reserves to mitigate potential shortfalls in operating cash.
Conversely, Colver has a strong cash balance to support debt service
under scenarios of material cash flow erosion through the remaining
short tenor of 2018.
Negative - Operating Expenses: Increased operating costs above the
projected increased maintenance costs could result in a downgrade;
Negative - Availability: Any extended outage resulting in decreased
availability and reduced cash flow could result in a downgrade.
Financial performance was adequate in 2015 with a Fitch calculated debt
service coverage ratio (DSCR) of 1.30x, which is just below the Fitch
calculated 2014 DSCR of 1.37x. Financial performance in 2015 YTD (11
months through November) was better than the sponsor's budget mostly due
to cost savings as revenues were 1.3% below 2015 budget and 2% below
2014. Cost savings stemmed from Colver taking advantage of the sponsor's
access to a proprietary opportunity coal, which is cheaper, more
efficient, and cleaner than fixed-price contracted coal options. The
project benefited from decreased usage of limestone with the higher
utilization of the cleaner opportunity coal. The project's cost profile
further benefited from an approval by the Pennsylvania Department of
Environmental Protection (DEP) to defer compliance with MATS
environmental requirements to April 2019, resulting in nearly $2 million
in lower costs in 2015. Overall, Fitch estimates that operating expenses
were 15% lower than budget and 1.3% lower than fiscal 2014.
Colver continued to experience persistent tube leaks through fiscal
2015, averaging one to two per month, typical of an aging coal facility.
Combined with a boiler feed pump failure in July 2015, dispatch at the
project was reduced to roughly 90% YTD through November, which
represents a deviation from levels traditionally above 96%. In an
environment of low demand, as well as the plant's persistent tube leaks
and major maintenance scheduled in autumn of 2016 to restore a rotor,
Fitch expects near term dispatch to remain consistent with 2015 levels.
Plant maintenance costs are expected to rise in FY 2016 due to the
planned generator rotor re-winding which will cost approximately $3.2
million. In addition, persistent tube leaks will place pressure on
maintenance costs going forward. The increased utilization of cheaper
and more efficient opportunity fuel is expected to continue to benefit
the project's cost profile. The opportunity fuel will enhance Colver's
management of sulfur content and resulting usage of limestone costs.
Continuation of lower diesel costs will help Cover to manage
transportation costs for fuel delivery and ash disposal.
Fitch's base case assumes 1% revenue growth through fiscal 2018 with
inflationary expense growth resulting in average debt service coverage
of 1.42x with a minimum of 1.11x in fiscal 2016. Under a combined
stress, Fitch's rating case assumes flat revenue throughout the
projected period with a 5% rise in expenses in fiscal 2016, thereafter
rising at inflationary levels based off of 2015 actuals. In this
scenario, Fitch estimates coverage levels are average 1.31x with a
minimum of 1.00x through fiscal 2018. While these metrics are not
indicative of a 'BB' rating, the short remaining debt tenor and
available liquidity of $24 million help to significantly reduce the
probability of default and support the rating at the current level.
The Colver Project consists of a nominal 111.15MW waste coal-fired
qualifying facility located on a 62-acre site in Cambria, Pennsylvania.
The project also includes a 9.6-mile, 115-kilovolt transmission line
interconnecting with the Pennsylvania Electric Company Glory Substation.
The Colver facility began commercial operations on May 16, 1995. The
senior bonds were issued on behalf of an owner-participant as part of a
leveraged-lease transaction. Colver's sponsor is a limited partnership,
Inter-Power/AhlCon Partners, which is held by subsidiaries of Northern
Under the terms of the PPA, Pennsylvania Electric Company(Penelec) pays
flat rates on annual energy up to 278 gigawatt-hours (GWh) of on-peak
production and 501 GWh/year off-peak production. Penelec purchases
excess energy, produced in excess of caps above, at the posted hourly
LMP or day-ahead price of PJM Interconnection, LLC.
Additional information is available at 'www.fitchratings.com'.
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
Rating Criteria for Thermal Power Projects (pub. 23 Jun 2015)
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