Fitch Affirms Lea Power Partners, LLC's Rating at 'BB+'; Outlook Stable
The rating of the Lea Power Project (LPP) derives from the project's fixed-price tolling style agreement with Southwestern Public Service (SPS, rated 'BBB'/Stable Outlook by Fitch). The tolling agreement provides revenue stability for LPP while mitigating supply risk, as SPS is responsible for providing fuel to the project. Following an increase from original projections, operating costs have stabilized in conjunction with a Long Term Service Agreement (LTSA) with Mitsubishi. However, rating case coverage ratios are not sufficient to reach an investment grade rating. The Stable Outlook reflects the project is expected to continue to perform near base case levels.
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 power purchase agreement (PPA) term.
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 historic variability during major overhaul years, the LTSA helps to smooth operating costs over the contract term, set to expire in 2022.
Debt Structure: Midrange
Typical Debt Structure - Debt structure 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.
Adequate Debt Service Coverage - Despite early operational challenges that pushed debt service coverage ratios (DSCR) to near breakeven, historical DSCRs have averaged 1.25x since 2008 with an initial LPP 2015 forecast DSCR of 1.35x. Under Fitch's rating case conditions, which incorporate a 10% increase to operations and maintenance expenses as well as increased outages with 95.1% availability, DSCRs are projected to average 1.37x with a minimum of 1.20x through debt maturity.
Comparable to Peers - Lea Power's DSCR profile is comparable to CE Generation, LLC ('BB-'/Stable Outlook) and other privately rated peers within Fitch's portfolio. CE Generation is exposed to market based pricing and faces structural subordination, resulting in a lower debt rating. A privately rated combined cycle peer (BBB-/Stable Outlook) exhibits a similar contracted structure as LPP, but maintains stronger coverage averaging 1.44x under Fitch's rating case.
Negative - Operating performance shortfall: A significant and sustained change to the operating performance and availability of the project reducing financial cushion below 1.30x could result in a downgrade.
Negative/Positive - Cost profile changes: Persistent operating costs 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.
Project performance remained near base case expectations with DSCRs of 1.37x for 2014. However, Fitch expects total coverage to fall below base case expectations in 2015, as the project incurred an outage following a planned maintenance overhaul in Q4, 2014. The outage was characterized as an arc fault, exacerbated by a malfunctioning neutral grounding transformer secondary trip circuit. Total repair costs of approximately $820 thousand were borne by the project with $3.1 million in lost revenues from unplanned downtime. DSCRs for 2015 through June are 1.24x, but are expected to increase through the remainder of the year as the project gained efficiencies following the F4 turbine overhaul. LPP management initially budgeted year-end 2015 coverage levels of approximately 1.35x, but expects to achieve DSCRs of approximately 1.30x following the outage.
The project derives the majority of its revenue from capacity payments (85.9% of total revenue in 2014), mitigating revenue volatility due to reduced output. In 2014, total revenue decreased 1.5% ($55.9 million) coinciding with a reduction to the capacity factor (55% compared to 63% during 2013). Stemming from the aforementioned efficiencies gained following the major maintenance, the project has tested below its contracted heat rate and achieved a capacity factor of 74% through June 2015. As a result, LPP expects to receive a $1.2 million payment per year as part of the PPA with SPS. Total revenue equals approximately $26.9 million through June 2015.
Total plant expenses in 2014 declined approximately 6.9% to $14.2 million, driven by a $1.57 million decline in property tax. The reduction in property tax resulted from a statutory allowance for semi-annual property tax payments, and the remaining 50% of the cost will be paid during 2015. LPP management initially estimated property tax to increase to approximately $2.4 million in 2015, with preliminary budgeted expenses at $14.3 million. Total project expenses equal $6.4 million through June 2015. In addition to plant expenses, LPP pays for major maintenance through the LTSA with Mitsubishi. The major maintenance expense increased to $4.7 million in 2014, up from $3.9 million in 2013. LPP expects major maintenance to increase to approximately $6 million in 2015 following the outage.
Fitch's rating case contemplates debt service coverage under stressed conditions aimed to capture increases in fixed and variable operation and maintenance (O&M) costs, as well as a reduction to plant availability. Debt service coverage in 2016 will be 1.30x in Fitch's rating case. Over the full debt term, rating case DSCRs average 1.37x, with a minimum of 1.20x (2032). The profile strengthens coinciding with the expiration of the LTSA with Mitsubishi, but remains susceptible to low coverage from increased O&M expenditures.
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.
The bonds are secured by a first priority interest in all real and personal property, tangible and intangible assets, revenues, accounts, project documents and ownership interests in LPP.