Fitch Ratings has affirmed the rating on Lea Power Partners, LLC's (LPP)
$245.7 million senior secured notes due 2033 at 'BB+'. The Rating
Outlook is Stable.
The rating reflects Lea Power Project's (LPP) fixed-price tolling style
agreement with Southwestern Public Service (SPS, rated 'BBB'/Stable
Outlook), which provides revenue stability for LPP and largely
eliminates supply risk. The Stable Outlook reflects expectations that
project performance can return to base case levels following maintenance
and repairs during recent planned and forced outages. Average debt
service coverage is expected to remain at 1.38x though maturity in
Fitch's rating case, with an overall declining coverage profile and
minimum debt service coverage ratio (DSCR) reaching 1.20x in 2032.
KEY RATING DRIVERS
Revenue Risk: Midrange
Stable Revenue Profile - The project is supported by a 25-year tolling
agreement with SPS under which SPS purchases capacity, energy and
ancillary services through 2033. Capacity payments provide roughly
80%-90% of the total revenues at a fixed price over the term of the
power purchase agreement (PPA).
Supply Risk: Stronger
Mitigated Supply Risk - The PPA with SPS is structured as a tolling
agreement, largely eliminating price and volume risks associated with
natural gas supply, as SPS is responsible for providing the fuel to the
project site.
Operation Risk: Midrange
Stabilized Operating Performance - The project has maintained high
availability, strengthening already contracted revenues through the
generation of dispatch availability revenues. Despite historical
variability during major overhaul years, the long-term service agreement
(LTSA) helps to smooth operating costs over the contract term, which
expires in 2024.
Debt Structure: Midrange
Typical Debt Structure - Structural features include a six-month debt
service reserve, working capital reserve and a major maintenance reserve
based on 100% of the current-year overhaul expenses and 50% of the
following year's expenses, which Fitch views as typical for a thermal
power project. The overall declining DSCR profile is a weakness,
notwithstanding the fixed-rate, fully-amortizing debt structure.
Adequate Debt Service Coverage: Despite early operational challenges
that pushed DSCR ratios to near breakeven, historical DSCRs have
averaged 1.25x since 2008 with an LPP 2016 forecast DSCR of 1.36x. Under
Fitch's rating case conditions, including a 10% increase to operations
and maintenance expenses as well as lower (95%) availability, DSCRs are
projected to average 1.38x through debt maturity, reaching a minimum of
1.20x in 2032.
Peers: Lea Power's peers include Kleen Energy Systems, LLC
('BB'/Negative Outlook) and Orange Cogen Funding Corporation
('BBB+'/Stable Outlook). All three projects are single-site, gas-fired,
combined-cycle cogeneration facilities with investment-grade off-takers.
Kleen Energy has a similar tolling style agreement, which expires in
2018, exposing the project to market-based pricing, and has experienced
continued cost volatility resulting in a lower average DSCR of 1.30x.
Orange Cogen is rated higher due to its relatively low leverage and high
DSCR of 2.93x, driven by a long history of strong operating performance
and resilient cash flow.
RATING SENSITIVITIES
Negative - Operating performance shortfall: A significant and sustained
change to operating performance and availability that reduces financial
cushion below 1.30x could result in a downgrade.
Negative/Positive - Cost profile changes: Persistent operating cost
increases above 10% could negatively affect the rating, while sustained
long-term cost reductions could result in improved project cash flow
consistent with a higher rating level.
SUMMARY OF CREDIT
Overall, the project's financial performance remains relatively
consistent with revised expectations, despite a severe outage in 2014
that affected 2015 capacity payments. Fitch expects the project to
recover to near base case levels in the near term, as LPP has exhibited
improving availability and a stable cost profile.
In fourth quarter 2014, the project incurred an outage following a
planned maintenance overhaul. The outage was caused by an arc fault in
the generator connection box. Total repair costs borne by the project
totalled approximately $820,000 with lost revenues from unplanned
downtime equivalent to about $3 million. As Fitch expected, total
coverage fell below base case expectations to 1.26x in 2015. Capacity
payments make up the majority of total revenues (82.9% of revenues in
2015), and are calculated based on a rolling 12-month availability
average. In 2015, total revenue decreased 1.4% ($55.1 million) affected
by the 2014 outage, while average net capacity factor had grown to 74%
(compared to 55% in 2014).
The project incurred a forced outage in June 2016, due to a circuit
breaker issue on the steam turbine, which was resolved in a week, but
reduced the capacity availability factor that month. The 12-month
rolling average capacity availability factor fell 1.3% to 92.39% as of
July 2016 and is expected to improve, leading to increased capacity
revenues. Revenue through June 2016 is 6% higher than the same time
period in 2015 due to the installed turbine upgrades and six-month 2016
coverage is currently at 1.29x. Management expects DSCR to increase to
1.36x by year-end as the project recovers.
Total expenses in 2015 continued to decrease, down 5% to $14.4 million,
due to reductions in O&M, G&A, insurance, and management fees. There
were no forced outages in 2015, which kept O&M costs low. 2016 expenses
are expected to grow 15%, due to plant and non-LTSA covered maintenance
performed concurrently with planned turbine inspections in the spring
and fall; aside from this increase, expenses are otherwise in line with
cost expectations. In addition to plant expenses, LPP must fund a major
maintenance reserve to pay monthly LTSA charges from Mitsubishi. The
major maintenance reserve increased 28% to $6.1 million in 2015 as a
result of the previous outage, but is expected to decrease to $5.8
million in 2016.
TRANSACTION SUMMARY
The project consists of a 604 megawatt natural gas-fired, combined-cycle
electric generating facility selling energy and capacity under a 25-year
PPA with SPS. SPS purchases capacity at a fixed price and obtains full
dispatch rights over the facility. LPP is reimbursed for nonfuel
variable operating costs through a separate fixed-price energy payment.
The PPA is structured as a tolling agreement, and SPS is responsible for
providing natural gas fuel. SPS is a fully integrated, investor-owned
electric utility serving New Mexico and parts of Texas. The project
entered into an LTSA with Mitsubishi Power Systems Americas, Inc. in
2011 which is set to expire in 2022 based on projected run hours. FREIF
North American Power, LLC owns a 100% indirect equity interest in LPP
and provides the liquidity reserve letter of credit.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/site/re/882594
Rating Criteria for Thermal Power Projects (pub. 28 Jun 2016)
https://www.fitchratings.com/site/re/883254
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012399
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012399
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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