Fitch Ratings said Jan. 23 that, due to concerns about an "aging" power plant that fires waste coal, it has downgraded the ratings on the Pennsylvania Economic Development Financing Authority's $169m aggregate series F resource recovery revenue refunding bonds due 2018 to 'BB' from 'BB+'.
The Rating Outlook is Stable.
"The downgrade reflects projected near-term breakeven debt service coverage levels and reduced cash flow due to a significant cost increase at the Colver Project," Fitch said. "This aging waste coal facility will continue to face increased maintenance, reduced output and low revenue growth tied to lower than expected GDP growth over the remaining project life. The near-term maturity of the debt combined with significant liquidity help to support the rating at the 'BB' level."
The Colver Project, which is in a group of small waste-coal-fired power plants built in Pennsylvania 20-25 years ago, relies on the ability of the operator to maintain high availability and capacity factors in order to maximize payments under the power purchase agreement (PPA), capture the benefit of excess energy sold at the locational marginal price (LMP) and provide revenue stability. LMP sales, despite their variability in price and small percentage relative to total revenues, help to add cushion to the cash flow profile, Fitch pointed out.
The project remains exposed to price fluctuations in commodities, uncertain emissions compliance costs and major maintenance. The recent reduction in diesel pricing could help to offset fluctuations in other commodity costs going forward; however, the project remains exposed to increased emissions costs as well as maintenance on an aging facility, Fitch said. In order to meet the Cross State Air Pollution Rule (CSAPR) and the impending Mercury Air and Toxic Standards (MATS) rule in 2016, the project will face incremental limestone costs for emissions control.
Despite 75% of waste coal under contract through debt maturity, the project is susceptible to potential price swings in the remaining 25% of spot coal supply, Fitch noted. The relative liquidity and depth of the waste coal market helps to mitigate this risk over the remaining debt tenor.
"During 2014, the project began to experience an increase in forced outages as a result of tube leaks," Fitch wrote. "By year end, the leaks were uncovered at a rate of one to two times per month and included leaks in areas of the plant that had been historically uncommon. These leaks are typical of an aging coal facility; however, combined with a major overhaul, the repairs reduced dispatch at the project to roughly 96.6%. Further, the sponsor expects the project to experience downtime related to a partial discharge issue on the generator in the near term. The timing of the tube leaks and the need for additional maintenance in 2015 is expected to push dispatch to roughly 96% compared to 98% average dispatch since 2007."
Operating costs at the Colver Project increased by roughly 6% during 2014 due largely to an increase in fuel and ash trucking costs. This cost is expected to continue going forward due to limited space at the existing site; however, the recent decreases in oil prices could temper the impact. Fitch said that budget 2015 estimates are based off of a higher oil price environment, providing some level of conservatism with regard to fuel costs. In addition to fuel expenses, the need for increased limestone volumes to comply with CSAPR will negatively impact cash flows during 2015.
While the operator has received a one-year extension, to April 2016, of the MATS deadline, the cost of compliance has been utilized for projections beginning in 2016. Overall, roughly $1.8m in total limestone purchasing and transportation costs will need to be added to the 2016-2018 period in order to capture emissions and comply with the MATS regulation. The project is also susceptible to increased limestone expenses in order to deal with the variability in sulfur content for the fuel supply, which could compound the effect of the supply cost going forward.
The Colver Project consists of a nominal 111.15-MW waste coal-fired qualifying facility (QF) located on a 62-acre site in Cambria, Pennsylvania. The project also includes a 9.6-mile, 115-kV transmission line interconnecting with Pennsylvania Electric's Glory Substation. The Colver facility began commercial operations in 1995. The senior bonds were issued on behalf of an owner-participant as part of a leveraged-lease transaction. Colver's sponsor is a limited partnership, Inter-Power/AhlCon Partners, which is held by subsidiaries of Northern Star Generation.
Under the terms of the PPA, Pennsylvania Electric pays flat rates on annual energy up to 278 gigawatt-hours (GWh) of on-peak production and 501 GWh/year off-peak production. Penelec purchases excess energy, produced in excess of the caps above, at the posted hourly LMP or day-ahead price of PJM Interconnection, Fitch added.