(The following statement was released by the
ratings agency)
Feb 7 - Moody's Investors Service has assigned a Ba3 rating to Longview
Power, LLC's $1.1 billion senior secured credit facilities, including $900
million in term and construction loans, a $100 million revolver, and a $100
million synthetic letter of credit facility. The outlook is stable.
Along with $930 million of equity, proceeds of the term and construction
loans will be used to help finance the construction of a $1.8 billion
coal-fired power plant. The revolver will be available to fund working capital
needs while the synthetic LC will be used to fulfill the debt service reserve
requirement upon substantial completion and post LCs to the project's
counterparties.
The Ba3 rating reflects the strong economics of the project, driven by low
variable costs. Supported by the significant equity commitment, projected
operating company financial metrics are robust for a single-asset merchant
plant despite the high capital costs. According to Moody's analyst Aaron
Freedman, these fundamental strengths offset multiple risks, related to both
construction and operations, though most of these are adequately mitigated
while few are very significant on their own.
Longview will be a 695 MW supercritical pulverized coal-generating station
with an 8,600 Btu/kWh heat rate located in Maidsville, WV, just south of the
Pennsylvania border and approximately 70 miles south of Pittsburgh. The project
sponsor is a fund managed by First Reserve, a private equity firm specializing
in energy industry investments.
The developer is GenPower LLC. The plant will have a five year, 300 MW
power purchase agreement (PPA) with PPL Energy Plus for energy and capacity
(guaranteed by PPL Energy Supply, LLC; Baa2 sr. sec.), with the balance of its
capacity and energy expected to be sold on a merchant basis in PJM's wholesale
energy and capacity markets. The project's very low variable costs are expected
to result in around the clock dispatch. The project will be constructed by Aker
Kvaerner Songer, with equipment including the turbine island supplied by
Siemens North America and the boiler supplied by Foster Wheeler pursuant to a
separate fixed price, date certain engineer-procure-construct (EPC) contracts
wrapped by a coordination agreement. Aker Kvaerner SA and Siemens North America
will provide a joint and several guarantee of their subsidiaries pursuant to
the coordination agreement, including performance and liquidated damages. The
boiler design incorporates a first-of-its kind design innovation intended to
improve efficiency and reduce operating costs. Coal is expected to be provided
by an adjacent mine through a long term supply contract; currently, however,
only half of the facility's expected demand has been secured with a binding
letter of intent. Water supply will be provided from water pumped from nearby
flooded mines and treated by a non-profit joint-venture to which Longview is a
party. The water treatment process, which involves a novel application of
existing technology, has reportedly garnered environmental support for the
project.
Moody's has identified the following project strengths and weaknesses:
Strengths/Opportunities
- Robust projected financial metrics at the operating company are supported by
significant equity contribution, including potential additional debt issued by
an intermediate holding company.
- With good economics resulting from low variable costs, the project is
expected to dispatch whenever available.
- Efficient design with a heat rate up to 10% lower than new conventional
sub-critical plants results in lower fuel requirements and emissions, while the
relatively large boiler allows greater use of cheaper, unwashed coal.
- Located adjacent to a coal mine that is expected to provide a long-term
source of low cost, high quality fuel, helping to reduce transportation and
coal washing costs relative to alternatives and resulting in a delivered cost
30% lower on a BTU basis.
- Additional locational advantages include proximity to the Monongahela River,
which provides access to alternative sources of fuel and a potential backup
water supply, a limestone quarry 10 miles away, and a nearby ash landfill.
- 300 MW PPA locks in energy and capacity prices for 43% of the project's 695
net capacity for five years with an investment grade counterparty. Capacity
payments commence June 1, 2011, but energy payments do not commence until
January 1, 2012, ten months after scheduled substantial completion.
- Long-term firm transmission rights have been secured to various nodes in
PJM, assuring access to PJM's well established, transparent, and liquid
wholesale energy market. PJM is projected to demonstrate continued growth in
demand and a reduction in reserve margins, helping to sustain an expected
robust pricing environment.
- Adequate construction risk mitigants include a joint-and-several guarantee
provided by experienced, reputable contractors of their obligations under the
fixed-price, date-certain EPC contract, adequate liquidated damages, and a
reasonable provision for contingencies in the construction budget.
- Financing and corporate documentation will provide standard project lender
protections and effective ring-fencing, including a waterfall, a conservative
restricted payments test, and dividend limitations, with a 100% cash sweep
after restricted payments that is expected to result in rapid debt paydown
under the sponsor's base case scenario.
Weaknesses/Risks
- Merchant risk, particularly in the first year of operation, exposes the
project to potential wholesale power market volatility.
- PJM's new capacity market price setting mechanism is unproven and could
produce lower than expected capacity revenues, though these are not expected to
account for a significant portion of the project's total revenues.
- High capital costs ($2,200/ net kW excluding fees and interest during
construction), due in part to use of supercritical technology.
- Prospect of a significant amount of additional leverage at the holding
company could reduce the rate of senior debt paydown and increase refinancing
risk, though the potential impact is limited by deep structural subordination
and the expectation that interest on the holding company debt will either be
equity funded or become payment-in-kind (PIK) if the operating company's
conservative restricted payments test is not met.
- Significant portion of the equity commitment is provided by an unrated
entity, albeit one with ample financial resources. No bank LC backstops this
portion of the equity, which is not expected to be provided until midway
through construction. Failure to provide the equity could result in an
insufficiency of funds to complete construction.
- Developer's lack of significant experience with coal plants could increase
risk of change orders, cost overruns, and operational challenges.
- Construction risk - this is a complex, greenfield project with new
technology. Additionally, the debt service reserve fund LC will not be issued
until substantial completion is reached, which could cause liquidity problems
in the event of a delay in completion.
- Already high projected water supply costs could potentially exceed
expectations due to uncertainties relating to the cost of pumping and treatment
of water in sufficient quantities to meet expected demand.
- Coal costs could potentially exceed expectations due to issues related to
the ability of the adjacent mine that is the expected source of supply to
produce sufficient quantities of coal to supply the plant's full requirements
at projected cost levels. Alternative sources of fuel are expected to be
significantly more costly.
- Absence of signed operating agreement could result in higher operating and
maintenance costs than currently projected. Operating risks are potentially
higher than normal due to the project's unproven boiler technology.
- With just a single turbine and boiler, the project has single asset risk,
which could leave it exposed under the PPA in the event of an unscheduled
outage during a high price period.
- Uncertainty regarding the effect of potential environmental regulations on
costs for emissions allowance credits and/or the level of capital spending that
may be necessary to achieve compliance.
- Despite the cash sweep, the project remains heavily levered at final
maturity under certain downside scenarios, which could expose lenders to
refinancing risk
- With interest rate hedges expected to expire in the first quarter of 2012,
the project will be exposed to interest rate risk.
Longview Power LLC is a bankruptcy-remote entity whose sole purpose will be
to construct, own, and operate the coal facility, which will be located in
Maidsville, WV.