Fitch says operational improvements ongoing at Red Hills plant

Fitch, citing ongoing improvements at a Mississippi power plant, on Nov. 10 affirmed Choctaw Generation Limited Partnership LLLP‘s (CGLP) combined $294.9m of pari passu lessor notes at ‘B’, Outlook Stable, and at ‘B-‘, Outlook Stable.

“The ratings on CGLP’s lessor notes reflect the susceptibility to underperformance of a facility reliant on ongoing modifications to improve its operational profile, which exhibits near breakeven coverage,” Fitch said. 

The owner-lessor, a subsidiary of Southern Co. (NYSE: SO), has agreed to fund modifications to improve performance at the lignite-fired Red Hills power plant. The operator, also a Southern subsidiary, is considered strong but the facility continues to perform poorly while performing needed repairs and maintenance and implementing ongoing modifications, Fitch noted.

CGLP’s mine-mouth location and a reputable fuel supplier reduce supply risk, Fitch said. The mine operator is Mississippi Lignite Mining, a unit of North American CoalCGLP has a power purchase agreement with the federally owned Tennessee Valley Authority for the project’s full capacity and energy output through mid-2032.

Owner-lessor SE Choctaw has made significant progress on the essential projects and baghouse retrofit that aim to improve efficiency, reduce long-term O&M costs, and enhance facility performance, Fitch said. Final installation of major new equipment is occurring during the fall outage from September through November 2014. Start-up and commissioning during the first quarter of 2015 will begin to establish the new baseline for performance. The cost of these projects, in aggregate, has remained within budget. Favorably for CGLP, SE Choctaw is responsible for funding any cost overruns that could occur during the final stages of modifications.

Operating performance over the past year remained weak. Overall, contract availability was 87.3% over the past year through September compared with expectations in the mid-90%-range. Completion of facility modifications is expected to improve reliability and move the operational profile in line with projections, Fitch said.

In December 2002, SE Choctaw purchased the 440-MW lignite-fired Red Hills Generation Facility from CGLP. Immediately following the acquisition, the owner leased the facility back to CGLP under a 45-year lease, expiring Dec. 20, 2047. Lessor notes were issued in accordance with the lease, but steady declines in performance prompted a restructuring of the original lessor notes. The lessor notes were restructured to reduce interest rates and extend the debt term. As part of the lease restructuring, the owner-lessor agreed to make approximately $60m in equity investments for needed repairs and maintenance and to implement various modifications to improve the performance of the facility. The restructuring also included a new operator and new refined coal purchase agreement. Along with the lease restructuring, the ownership interest in lessee Choctaw was sold to two indirect wholly owned subsidiaries of PurEnergy I LLC, Fitch said.

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.