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 January 11, 2016 - 5:34 PM EST
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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: Midrange

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.

RATING SENSITIVITIES

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.

CREDIT SUMMARY

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 Star Generation.

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'.

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

Rating Criteria for Thermal Power Projects (pub. 23 Jun 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997725

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997725

Endorsement Policy

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

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Fitch Ratings
Primary Analyst
Yvette Dennis, +1-212-908-0668
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew Joynt, +1-415-732-5622
Associate Director
or
Committee Chairperson
Gregory Remec, +1-312-606-2339
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com


Source: Business Wire (January 11, 2016 - 5:34 PM EST)

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