Fitch Ratings said Oct. 5 that it has affirmed the rating for coal plant operator Choctaw Generation Limited Partnership LLLP‘s (CGLP) combined $295.2 million of pari passu lessor notes.
- $235.9 million ($221.1 million outstanding) Series 1 lessor notes due December 2031 at ‘B’/Stable Outlook;and
- $59 million ($74.1 million outstanding) Series 2 lessor notes due December 2040 at ‘B-‘; Outlook revised to Negative from Stable
The ratings reflect the coal plant’s susceptibility to underperformance and dependence on an improved operational profile following recently completed facility modifications, Fitch wrote. The Negative Outlook on Series 2 is based on higher than expected deferment of payments to date and the potential for increased default risk if the project is unable to achieve base case performance.
CGLP has a power purchase agreement (PPA) with the Tennessee Valley Authority (TVA; ‘AAA’/Stable Outlook) for the project’s full capacity and energy output through mid-2032. The Series 1 notes mature four months prior to PPA expiration. Under a variety of sensitivity scenarios, a significant portion of Series 2 debt would remain unpaid prior to PPA expiration. There is a high level of uncertainty regarding CGLP’s ability to operate economically in a fully merchant environment, Fitch said.
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 fuel 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.
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, extend the debt term, and introduce a payment-in-kind (PIK) feature to Series 2.
As part of the lease restructuring, Fitch reported that the owner-lessor agreed to make approximately $60 million 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 CGLP was sold to two indirect wholly owned subsidiaries of PurEnergy I LLC.
Upgrades completed at the end of 2015 have yet to demonstrate performance in line with expectations, Fitch said. The equivalent availability factor and capacity factor, at 91.5% and 75.2%, respectively, are below rating case expectations of 94% and 86%. The operator expects performance to improve, as outstanding issues were recently resolved during the spring outage, and has not changed its long-term expectation for operations.
Although operating performance has fallen short of expectations so far in 2016, the capacity factor has increased significantly from 2014, when ongoing plant modifications required relatively long plant outages, Fitch added. CGLP is expected to incur reduced downtime moving forward to mainly address maintenance needs. However, the project has depleted the allowable PPA outage hours and any additional downtime from 2016 to 2017 will count against the project’s availability, directly impacting PPA revenues. The allowable outage hours reset in five-year cycles with the next cycle beginning in 2018. Series 2 payments are being deferred through a mandatory PIK feature into 2017.
Uncertainty remains if the project will be able to achieve base case forecasts without additional capital expenditures or equity support, Fitch said. CGLP is continuing to explore further reliability improvements to enhance performance with on-going discussions involving both sponsors and noteholders.
The Red Hills plant features twin Alstom Circulating Fluidized Bed (CFB) boilers fueled primarily by local Mississippi lignite. The adjacent lignite mine is operated by a unit of North American Coal.