OREANDA-NEWS. March 31, 2016. Fitch Ratings has affirmed Plains End Financing LLC's (Plains End) senior secured bonds at 'BB' and subordinated secured bonds at 'B+'. The Rating Outlook for all bonds is Stable.

The affirmation and Rating Outlook of the senior and subordinate debt reflect the continued strong operations and a stabilized cost profile. The project benefits from a fixed-price tolling agreement with an investment grade counterparty. However, intermittent dispatch and operating costs above the original projections have resulted in cash flows consistent with the current ratings. The potential for refinance risk and the structural subordination of the junior notes compounds this risk.

KEY RATING DRIVERS

Stable Contracted Revenues [Revenue Risk- Midrange]

The project benefits from stable and predictable revenues under two 20-year fixed price power purchase agreements (PPAs) with a strong utility counterparty, Public Service Company of Colorado (PSCo, rated `A-' with a Stable Outlook). Under the tolling-style agreements, PEI and PEII receive capacity payments that account for approximately 82% of consolidated revenues. However, energy margins may not sufficiently fund accelerated overhaul expenses as a result of increased dispatch.

Low Supply Risk [Supply Risk- Stronger]

The PPAs with PSCo are tolling-style agreements. Under the contracts, all variable fuel expenses are passed through to PSCo, subject to heat rate adjustments. The contracts represent a stronger attribute that limits the fuel supply risk to the project.

Operational Stability Mitigates Cost Increases [Operation Risk- Midrange]

The project was designed to provide backup generation for nearby wind projects due to the intermittency of wind resources. The project faces accelerated major maintenance and less than full recovery of variable expenses when the project is dispatched at a rate higher than anticipated. Dispatch has decreased from the 2008 high; however, the project is still susceptible to decreased cash flow from accelerated major maintenance. This risk is partially mitigated by strong availability and a stabilized cost profile.

Refinance Risk Poses Threat for Subordinated Debt [Debt Structure- Midrange (Senior)/ Weaker (Subordinated)]

While the senior debt benefits from a typical project finance structure, the 'B+' rating on the subordinate notes reflects the potential for refinance risk in 2023 if the project is unable to meet target amortization amounts. Under the Fitch rating case, which demonstrates the effect of reduced cash flow to the subordinate tranche, there is still sufficient cushion to repay the sub notes by 2023. If the project is only able to meet the minimum amortization payments, however, there would be a balloon in 2023 for the outstanding amount. The project is current on all target amortization.

Debt Service Profile Remains Consistent

While the 2015 DSCR decreased due to recognition of accrued expenses for planned engine maintenance, the costs are fully covered under the long term service agreement (LTSA) with Wartsila. The budgeted 2016 consolidated DSCR of 1.08x is in line with Fitch's rating case scenario. Under the rating case, which incorporates increased dispatch to accelerate costs as well as a 5% increase to operating costs and a 10% increase to major maintenance, the average DSCR is 1.32x with a minimum of 0.79x during the final year at the senior level and consolidated DSCRS (including subordinated debt) average 1.07x with a minimum of 1.01x at the sub note level.

Consistent with Peers

Mackinaw Power, LLC ('BBB-'/Stable Outlook) is a natural gas fired plant that operates under tolling agreements like Plains End but benefits from adequate cost recovery from higher dispatch unlike Plains End. The average rating case DSCR of 1.44x is higher than Plains End resulting in the higher rating. CE Generation, LLC's ('BB-', Stable Outlook) is comparable to the subordinated notes as cash flow is reliant on distributions from a portfolio of geothermal projects that include structurally senior project level debt. Projected DSCRs for CE Generation are near breakeven over the near term, consistent with that of the subordinate debt at Plains End but the higher rating incorporates Fitch's expectation that the parent will continue to provide equity support.

RATING SENSITIVITIES

Negative - Dispatch Sensitivity: Sustained increased dispatch would accelerate major maintenance and negatively impact cash flow.

Positive - Cash Flow Projection Revisions: Further cost savings improvement or structural revenue enhancements above the projected level could result in an upgrade.

CREDIT UPDATE

During fiscal year 2015, Plains End experienced a drop off in dispatch to 2.3% on average across both sites. The decrease in dispatch was primarily driven by the availability of the offtaker's wind regime as the project acts as backup for the intermittent resource. The decreased capacity factor resulted in a 38% reduction to energy revenues for the year. Total revenues consist primarily of capacity payments, however, with energy revenues currently representing less than 1% of the total. Further, since revenues from increased dispatch would not fully compensate for the increased variable and maintenance costs (including a PPA capacity payment which does not include downtime for maintenance), the project benefits from a low annual capacity factor.

Operating expenses increased by 24% or \\$2.3 million with a majority of the increase due to recognition of maintenance on the PEII engines completed in 2015. The costs are fully covered under the LTSA signed with Wartsila. As a result, cash payments for the work are spread throughout the LTSA term. Fitch's DSCR calculation includes the accrued expenses resulting in a DSCR in 2015 of 1.10x for the senior notes and 0.98x on a consolidated basis. The sponsor reported senior DSCR of 1.43x and consolidated DSCR of 1.28x are under a cash basis reporting requirement.

The major maintenance funding cycle has been updated for this review to reflect the sponsor's expectations for dispatch, run hours and maintenance needs though overall changes are minimal in terms of impact. Due to the low dispatch at PEI, there are no major overhauls expected before 2021. PEII is not expected to receive a 16,000 hour major maintenance outage prior to 2017. In addition, the sponsor believes that its ability to swap out engines during the overhaul should help to reduce the impact to availability. The Fitch base and rating cases now incorporate new major maintenance funding patterns. Additionally, the sponsor is in discussions with the State of Colorado regarding their property tax assessments as stability of total operating costs are important in maintaining adequate cash flow for repayment on both debt tranches.

TRANSACTION SUMMARY

Plains End is indirectly owned by Tyr Energy (50%), John Hancock (35%) and Prudential (15%) following the May 2013 sale. Plains End was formed solely to own and develop two gas-fired peaking projects, PEI and PEII, located in Arvada, Jefferson County, Colorado. The plants are peaking facilities used primarily as a back-up for wind generation, as well as other generation sources, in Colorado with a combined capacity of 228.6 MW. Combined cash flows from both plants service the obligations under the two bond issues.

PEI and PEII have long-term PPAs structured as tolling contracts with PSCo that expire in 2028. Under the PPAs, PSCo has a right to all of the capacity, energy and dispatch of the facilities. PEI and PEII receive capacity payments and variable energy payments. NAES Corporation (NAES) has continued as operator, supporting operational stability. Both Tyr and NAES have the same parent company, ITOCHU Corporation, demonstrating a further alignment of interests.

SECURITY

Plains End's obligations are jointly and severally guaranteed by operating plants PEI and PEII. The obligations of the issuer and guarantors are secured by a first-priority perfected security interest in favor of the collateral agent. The collateral includes all real and personal property, all project documents and material agreements, all cash and accounts, and all ownership interests in the issuer and guarantors. The collateral will be applied first to the senior secured bonds and then to the subordinated secured notes.