Fitch Affirms Plains End Financing, LLC; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BB' rating on Plains End Financing, LLC's (Plains End) $117.7 million senior secured bonds (senior bonds), and 'B+' rating on the $20.3 million subordinated secured notes (sub notes). The Outlook remains Stable. The affirmation and Outlook reflect the continued strong operations and stabilized operating costs leading to coverage levels consistent with the current rating.

KEY RATING DRIVERS

--Stable Contracted Revenues: 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 by Fitch). Under the tolling-style agreements, Plains End LLC (PEI) and Plains End II LLC (PEII) receive substantial capacity payments that account for 82% of consolidated revenues. However, energy margins may not sufficiently fund accelerated overhaul expenses as a result of increased dispatch. (Revenue Risk: Midrange)

--Low Supply Risk: The PPA with PSCo is a tolling-style agreement. Under the contract, all variable fuel expenses are passed through to PSCo, subject to heat rate adjustments. The contract is a stronger attribute that limits the fuel supply risk to the project. (Supply Risk: Stronger)

--Operational Stability Mitigates Cost Increases: 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 when the volatility in wind causes the project to be 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 including property taxes. (Operation Risk: Midrange)

--Refinance Risk Poses Threat for Subordinated Debt: 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 Structure: Midrange/Weaker)

--Debt Service Profile Remains Consistent: 2013 actual and 2014 projected debt service coverage ratios (DSCR) for both the senior and subordinated debt fall in line with current projections under the Fitch 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. Under this scenario, the average DSCR is 1.36x with a minimum of 1.26x at the senior level and 1.09x and 1.04x at the sub note level.

RATING SENSITIVITIES

--Further cost savings improvement or structural revenue enhancements could result in an upgrade;

--Sustained increased dispatch would accelerate major maintenance and negatively impact cash flow.

SECURITY

Plains End's obligations are jointly and severally guaranteed by operating plants Plains End LLC (PEI) and Plains End II LLC (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.

CREDIT UPDATE

Operations since Fitch's prior annual review have been relatively stable with strong availability levels (99.5% for 2013 and 99.9% through February 2014) and a 2013 dispatch level of 7.2%, compared to Fitch's base case assumption of 9.99%. Overall revenues increased by 11% in 2013, largely due to a contractual step-up in capacity payments with additional cushion attributed to increased dispatch and energy revenues. Offsetting additional generating revenues, operating costs increased by 13% during 2013 while total debt service increased by 12%. The result is a DSCR of 1.31x for 2013 compared to 1.37x during 2012 under Fitch's calculation. Fitch notes that reported 2013 DSCR per the sponsor calculation was 1.20x, due to the timing of accrued operating costs.

Following the project's acquisition in 2013, there have been several initiatives fully or partially implemented in order to improve cash flow stability going forward. During 2013, the sponsor replaced all insurance policies, which should account for a $60,000 reduction in costs going forward. The sponsor has also reduced staffing in order to realize savings of $250,000-$260,000 per year with a realignment of incentive plans to ensure stable performance.

There have been no changes to the compliance regulations at the project and the sponsor has continued to renew permits under the Title V air rule. The major maintenance funding cycle has been updated for this review to reflect the sponsor's expectations for dispatch, run hours and maintenance needs. Due to the low dispatch at PEI, there are no major overhauls expected before 2021. PEII is expected to receive a 16,000 hour major maintenance outage in 2017, though the sponsor believes that their ability to swap out engines during the overhaul should help to reduce the impact to availability. Further, the PPA calculation for capacity payments does not include downtime for scheduled major maintenance. The Fitch base and rating cases now incorporate new major maintenance funding patterns reflective of a five-year cycle of relatively stable costs, consistent with management expectations.

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 that generally reimburse their variable operating expenses. 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.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Thermal Power Projects' (June 17, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Thermal Power Projects

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710786

Additional Disclosure

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Contacts

Fitch Ratings
Primary Analyst
Nicole Czarny
Associate Director
+1-212-908-0684
Fitch Ratings
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
John Kennedy
Director
+1-212-612-7853
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Nicole Czarny
Associate Director
+1-212-908-0684
Fitch Ratings
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
John Kennedy
Director
+1-212-612-7853
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com