Despite open market issues, Fitch gives Kincaid coal plant a solid rating

Fitch Ratings thinks that the coal-fired Kincaid power plant in Illinois of Dominion Resources (NYSE:D) has a pretty solid future, unlike Dominion’s State Line coal plant in Indiana, which is located along the Illinois/Indiana state line.

During the second quarter of 2011, Dominion announced its intention to retire the 515-MW State Line plant by mid 2014. During the third quarter of 2011, Dominion announced an accelerated schedule for State Line, with the facility to be retired in the first quarter of 2012 due to a continued decline in power prices and the expected cost to comply with environmental regulations.

Fitch Ratings said March 5 that has affirmed the ‘BBB-‘ rating on Kincaid Generation LLC‘s $265m ($158.6m outstanding) senior secured bonds due 2020. The rating outlook is stable.

Kincaid will be fully exposed to capacity, energy, and coal market prices beginning in March 2013, Fitch noted. However, Dominion Resources, the project sponsor, has entered into a multi-year hedging program to mitigate merchant price risk. Fitch believes the project’s stable operating profile, competitive cost structure, and relatively low leverage make it competitive in the merchant market.

The Kincaid project has historically exhibited strong availability factors and consistently lower than forecasted operating costs. Kincaid’s strong operating profile, in conjunction with the announced plant closures in the region, is expected to enhance dispatch prospects during the merchant period, Fitch said.

The magnitude and timing of new emissions regulations are uncertain, particularly given that a federal appeals court in December 2011 issued a stay of the Cross-State Air Pollution Rule (CSAPR). Fitch said it views the installation of incremental emission control equipment positively. Fitch expects the project’s environmental control equipment to mitigate Kincaid’s exposure to CSAPR and limit future environmental compliance costs.

Fitch noted that Kincaid is currently compliant with existing NOx and SO2 emissions regulations, and that it is installing a dry sorbent injection (DSI) system that will allow it to comply with more stringent future SO2 limitations expected in the future. DSI capital costs will reduce operating cash flow.

Kincaid intends to sell 100% of its energy generation into the PJM merchant power market. Dominion Resources has begun hedging capacity, energy, and fuel prices to reduce cash flow volatility. Fitch forecasts a gradual improvement in average market capacity and energy prices throughout the merchant period, but expects prices to remain susceptible to considerable volatility. The project’s relatively low leverage of $143 per kilowatt hour is expected to provide financial flexibility, while its stable operating profile, competitive cost structure, and the announced plant closures improve dispatch prospects during the merchant period.

Fitch noted that Kincaid Generation consists of a 1,108-MW, coal-fired plant located in Kincaid, Ill., 17 miles southeast of Springfield, Ill. U.S. Energy Information Administration data shows the plant taking coal in December 2011 from two Wyoming Powder River Basin mines; the North Antelope Rochelle operation of Peabody Energy (NYSE:BTU) and the Antelope mine of Cloud Peak Energy (NYSE:CLD).

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.