Fitch Ratings has affirmed Plains End Financing LLC's (Plains End)
senior secured bonds at 'BB' and subordinated secured bonds at 'B+'. The
Rating Outlook for all bonds is Stable.
The affirmation and Rating Outlook of the senior and subordinate debt
reflect the continued strong operations and a stabilized cost profile.
The project benefits from a fixed-price tolling agreement with an
investment grade counterparty. However, intermittent dispatch and
operating costs above the original projections have resulted in cash
flows consistent with the current ratings. The potential for refinance
risk and the structural subordination of the junior notes compounds this
risk.
KEY RATING DRIVERS
Stable Contracted Revenues [Revenue Risk- Midrange]
The project benefits from stable and predictable revenues under two
20-year fixed price power purchase agreements (PPAs) with a strong
utility counterparty, Public Service Company of Colorado (PSCo, rated
`A-' with a Stable Outlook). Under the tolling-style agreements, PEI and
PEII receive capacity payments that account for approximately 82% of
consolidated revenues. However, energy margins may not sufficiently fund
accelerated overhaul expenses as a result of increased dispatch.
Low Supply Risk [Supply Risk- Stronger]
The PPAs with PSCo are tolling-style agreements. Under the contracts,
all variable fuel expenses are passed through to PSCo, subject to heat
rate adjustments. The contracts represent a stronger attribute that
limits the fuel supply risk to the project.
Operational Stability Mitigates Cost Increases [Operation Risk- Midrange]
The project was designed to provide backup generation for nearby wind
projects due to the intermittency of wind resources. The project faces
accelerated major maintenance and less than full recovery of variable
expenses when the project is dispatched at a rate higher than
anticipated. Dispatch has decreased from the 2008 high; however, the
project is still susceptible to decreased cash flow from accelerated
major maintenance. This risk is partially mitigated by strong
availability and a stabilized cost profile.
Refinance Risk Poses Threat for Subordinated Debt [Debt Structure-
Midrange (Senior)/ Weaker (Subordinated)]
While the senior debt benefits from a typical project finance structure,
the 'B+' rating on the subordinate notes reflects the potential for
refinance risk in 2023 if the project is unable to meet target
amortization amounts. Under the Fitch rating case, which demonstrates
the effect of reduced cash flow to the subordinate tranche, there is
still sufficient cushion to repay the sub notes by 2023. If the project
is only able to meet the minimum amortization payments, however, there
would be a balloon in 2023 for the outstanding amount. The project is
current on all target amortization.
Debt Service Profile Remains Consistent
While the 2015 DSCR decreased due to recognition of accrued expenses for
planned engine maintenance, the costs are fully covered under the long
term service agreement (LTSA) with Wartsila. The budgeted 2016
consolidated DSCR of 1.08x is in line with Fitch's rating case scenario.
Under the rating case, which incorporates increased dispatch to
accelerate costs as well as a 5% increase to operating costs and a 10%
increase to major maintenance, the average DSCR is 1.32x with a minimum
of 0.79x during the final year at the senior level and consolidated
DSCRS (including subordinated debt) average 1.07x with a minimum of
1.01x at the sub note level.
Consistent with Peers
Mackinaw Power, LLC ('BBB-'/Stable Outlook) is a natural gas fired plant
that operates under tolling agreements like Plains End but benefits from
adequate cost recovery from higher dispatch unlike Plains End. The
average rating case DSCR of 1.44x is higher than Plains End resulting in
the higher rating. CE Generation, LLC's ('BB-', Stable Outlook) is
comparable to the subordinated notes as cash flow is reliant on
distributions from a portfolio of geothermal projects that include
structurally senior project level debt. Projected DSCRs for CE
Generation are near breakeven over the near term, consistent with that
of the subordinate debt at Plains End but the higher rating incorporates
Fitch's expectation that the parent will continue to provide equity
support.
RATING SENSITIVITIES
Negative - Dispatch Sensitivity: Sustained increased dispatch would
accelerate major maintenance and negatively impact cash flow.
Positive - Cash Flow Projection Revisions: Further cost savings
improvement or structural revenue enhancements above the projected level
could result in an upgrade.
CREDIT UPDATE
During fiscal year 2015, Plains End experienced a drop off in dispatch
to 2.3% on average across both sites. The decrease in dispatch was
primarily driven by the availability of the offtaker's wind regime as
the project acts as backup for the intermittent resource. The decreased
capacity factor resulted in a 38% reduction to energy revenues for the
year. Total revenues consist primarily of capacity payments, however,
with energy revenues currently representing less than 1% of the total.
Further, since revenues from increased dispatch would not fully
compensate for the increased variable and maintenance costs (including a
PPA capacity payment which does not include downtime for maintenance),
the project benefits from a low annual capacity factor.
Operating expenses increased by 24% or $2.3 million with a majority of
the increase due to recognition of maintenance on the PEII engines
completed in 2015. The costs are fully covered under the LTSA signed
with Wartsila. As a result, cash payments for the work are spread
throughout the LTSA term. Fitch's DSCR calculation includes the accrued
expenses resulting in a DSCR in 2015 of 1.10x for the senior notes and
0.98x on a consolidated basis. The sponsor reported senior DSCR of 1.43x
and consolidated DSCR of 1.28x are under a cash basis reporting
requirement.
The major maintenance funding cycle has been updated for this review to
reflect the sponsor's expectations for dispatch, run hours and
maintenance needs though overall changes are minimal in terms of impact.
Due to the low dispatch at PEI, there are no major overhauls expected
before 2021. PEII is not expected to receive a 16,000 hour major
maintenance outage prior to 2017. In addition, the sponsor believes that
its ability to swap out engines during the overhaul should help to
reduce the impact to availability. The Fitch base and rating cases now
incorporate new major maintenance funding patterns. Additionally, the
sponsor is in discussions with the State of Colorado regarding their
property tax assessments as stability of total operating costs are
important in maintaining adequate cash flow for repayment on both debt
tranches.
TRANSACTION SUMMARY
Plains End is indirectly owned by Tyr Energy (50%), John Hancock (35%)
and Prudential (15%) following the May 2013 sale. Plains End was formed
solely to own and develop two gas-fired peaking projects, PEI and PEII,
located in Arvada, Jefferson County, Colorado. The plants are peaking
facilities used primarily as a back-up for wind generation, as well as
other generation sources, in Colorado with a combined capacity of 228.6
MW. Combined cash flows from both plants service the obligations under
the two bond issues.
PEI and PEII have long-term PPAs structured as tolling contracts with
PSCo that expire in 2028. Under the PPAs, PSCo has a right to all of the
capacity, energy and dispatch of the facilities. PEI and PEII receive
capacity payments and variable energy payments. NAES Corporation (NAES)
has continued as operator, supporting operational stability. Both Tyr
and NAES have the same parent company, ITOCHU Corporation, demonstrating
a further alignment of interests.
SECURITY
Plains End's obligations are jointly and severally guaranteed by
operating plants PEI and PEII. The obligations of the issuer and
guarantors are secured by a first-priority perfected security interest
in favor of the collateral agent. The collateral includes all real and
personal property, all project documents and material agreements, all
cash and accounts, and all ownership interests in the issuer and
guarantors. The collateral will be applied first to the senior secured
bonds and then to the subordinated secured notes.
Additional information is available on 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=1001731
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001731
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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