Fitch Affirms Lea Power Partners, LLC Rating at 'BB+'; Outlook Stable

NEW YORK--()--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

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Contacts

Fitch Ratings
Primary Analyst
Christopher Joassin
Director
+1 312-368-3166
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Justin Wu
Associate Director
+1 415-732-5612
or
Committee Chairperson
Gregory Remec
Senior Director
+1 312-606-2339
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com