Fitch Ratings said Oct. 21 that it has affirmed coal-fired power plant operator Choctaw Generation Limited Partnership LLLP‘s (CGLP) combined $294.9 million of pari passu lessor notes.
The ratings on CGLP’s lessor notes reflect the susceptibility to underperformance of a Mississippi facility reliant on ongoing efforts to improve its operational profile, Fitch noted.
The owner-lessor, a subsidiary of Southern Co. (NYSE: SO), funded substantial modifications to improve plant performance. The operator, also a Southern subsidiary, is considered strong but the facility has not yet achieved expected operating performance following completion of modifications, Fitch said.
CGLP’s mine-mouth location and a reputable lignite coal supplier reduce supply risk. However, early termination or expiration of the supply agreement in 2032 with potentially less favorable pricing could lead to inadequate fuel cost recovery, Fitch said.
CGLP has a power purchase agreement (PPA) with the federally owned Tennessee Valley Authority (rated ‘AAA’, Stable Outlook by Fitch) 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 the baghouse retrofit. Given that the projects have been completed within budget, SE Choctaw has added some minor additional-scope projects to further improve facility efficiency and performance, Fitch reported. However, operating performance since completion of the modifications has not yet met expectations. Turbine performance testing measured below guaranteed limits, the baghouse retrofit has not met specifications for bag wear and mechanical reliability, and the project suffered several outages due to refractory failure. The operator plans to resolve these issues through warranty claims and further repairs during the spring 2016 outage.
Overall, project performance has been mixed in 2015. The equivalent availability and capacity factors, at 88.8% and 85%, respectively, through August, are both below rating-case expectations of 94% and 86%. However, the project heat rate has met expectations at just under 11,000 Btu/kWh. The operator expects to further improve reliability, as outstanding issues are resolved, and has not changed its long-term expectation for operations, Fitch said.
Although operating performance has been lower-than-expected in 2015, the capacity factor increased significantly from the 2014 level of 64%, as there are no further outages planned to implement plant modifications. This facilitated a significant increase in capacity revenue, while operating costs have stayed steady.
Fitch anticipates operational performance will eventually meet management’s expectation and has not altered the base- and rating-case assumptions.
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 notes were restructured to reduce interest rates and extend the debt term. 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.
The PurEnergy LLC website said the plant is made up of twin Alstom Circulating Fluidized Bed (CFB) boilers fueled primarily by local Mississippi lignite that supply steam to a common Toshiba steam turbine generator.