NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed PPL Montana, LLC's (PPLM) $338 million pass-through trust certificates due 2020 at 'BBB-'. The Rating Outlook remains Stable.
The rating reflects an investment-grade profile buoyed by substantial liquidity provided by the corporate parent to manage the project's cash flows amid increasing exposure to low merchant market prices.
KEY RATING DRIVERS
Merchant Revenues: PPLM manages a diverse portfolio of coal and hydro assets, selling energy at market-based prices. Persistently low power prices have pressured revenues, though the project's competitive position remains strong due to the base load nature of the assets. PPLM has dispatched its coal fired capacity below historic levels and any recovery in output will depend upon an improvement in market conditions.
Stable Operations: The project benefits from a history of stable operating performance, and PPLM continues to control costs to maintain its solid financial profile.
Supply Risk: Hydrology variability is mitigated by management's use of the last 10 years of historical water flows, which include drought-like conditions, to project energy production. Persistence of low hydrology, however, could materially erode future cash flow. Exposure to potential increases in coal prices is mitigated by most of the coal supply coming from a mine mouth facility sufficient to meet requirements through 2019.
Financial Performance: The potential for short-term financial underperformance is mitigated by external liquidity, and PPLM will benefit from a sharply declining debt service burden after 2015. Fixed coverage charge ratios (FCCR) averaged 2.99 times (x) over the last 10 years, including 3.33x in 2012. With increasing merchant exposure, Fitch's rating case projects FCCRs pressured to fall below 1.0x in 2014 and 2015, where rent service is highest followed by FCCRs in excess of 2.0x. Available liquidity through May 2015 in the form of $100 million line of credit from the corporate parent, PPL ('BBB'/Stable Outlook) is factored into the rating as key to managing the project's cash flow profile at the investment-grade level.
RATING SENSITITIVITIES
--Increased exposure to merchant power prices due to an inability to renew contracts (e.g. hedges and PPAs) on favorable terms.
--Persistent reductions in hydrology or coal plant production that materially reduce overall energy production.
--Inability to manage capital expenses that could materially erode cash flow.
SECURITY
Though security for the rated debt is limited to the owner-lessors' interests in the Colstrip power plant, PPLM's obligation to pay rent is a general unsecured obligation of PPLM. As such, revenue derived from operation of the entire portfolio is available for rent payments.
CREDIT UPDATE
Revenues: Management has made progress in signing short-term contracts. However, Fitch expects material exposure to merchant power prices to persist long term, affecting more than 50% of the project's generation output. Revenues will be further pressured beginning in 2015 due to planned decreases in generation output. Management has announced that it will mothball the Corrette coal plant in April 2015, as continued operation is no longer economic based upon current estimates of environmental compliance. Further reduction in generation output will result from the expected sale of Kerr Dam to the Flathead Reservation in 2015. By 2016 total generation output is expected to be reduced by approximately 24% (compared to 2013) from the loss of Corrette and Kerr output. Reduced costs (fuel, rent, transmission, and maintenance) will partially offset the revenue loss.
Costs: Management has made progress in controlling costs. The five-year capital expenditure plan is lower by approximately 24% compared to last year. The current plan supports management's efforts to continue to fund necessary investments to maintain plant performance and compliance with environmental requirements. Management has budgeted for compliance with the Mercury Air Toxic Standards (MATS) rules and haze requirements (nitrogen and sulfur) for the Colstrip coal units. Though the Rainbow Dam upgrade was completed in the first quarter of 2013 (1Q'13), resulting in 23 MW of increased capacity, no further expansions for any of the assets are currently envisioned.
Operating Performance: The hydro and coal units continue to demonstrate solid availability consistent with historical performance. The hydro units achieved overall availability of 94.9% and generation output consistent with past years. The coal facilities achieved availability ranging from 82% to 92%. Capacity factors reflect a recent trend in a steady decline in coal plant usage for economic reasons as management reports no material forced outages. Reduced coal plant dispatch in recent years supports cost cutting efforts in fuel and operation and maintenance expenses as the project is able to obtain cheaper power from the market to meet firm delivery requirements.
Financial Performance: The project's financial performance is most vulnerable to decline in 2013-2015 as annual rent service peaks, management implements its capital plan, and there is a possibility of increased environmental compliance costs for the project's coal units. Under a combination stress that incorporates increased expenses and reduced generation output, Fitch projects FCCRs below 1.0x in 2014 and 2015 as the project reaches its maximum annual rent service ($39 million-$45 million). FCCRs rebound to over 2.0x as rent service payments decline substantially to $15 million in 2016 and less than $5.5 million through maturity in 2020. The $100 million line of credit available through May 2015 and subject to renewal provide adequate liquidity to smooth cash flow at the investment grade level in the near term as repayment under the credit facility is subordinate to senior rent service.
PPLM owns, operates and leases a portfolio of 13 hydroelectric and coal-fired generating facilities with an aggregate capacity of 1,239 MW. The PPLM portfolio includes 11 hydro projects, a storage reservoir, the coal-fired Corette facility and the owner-lessors' share of the Colstrip coal facility. The pass-through certificates were issued by a pass-through trust to fund the owner-lessor's acquisition of the leased Colstrip assets, which represent 25% of Colstrip's 2,094MW capacity and 41% of PPLM's total portfolio capacity. Rental payments include equity payments to the owner-lessors and annual rent service on the trust certificates maturing in 2020.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', July 12, 2012.
Applicable Criteria and Related Research
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789732
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