-- Following our review of the recent operational performance of U.S.
power generator Kiowa Power Partners LLC (KPP), we have concluded that the
project has overcome its operational issues that have been a rating risk in
-- We are revising the outlook on KPP's and its holding company, Tenaska
Oklahoma I L.P.'s (TOILP) senior secured bonds to stable from negative.
-- We are affirming the 'BBB-' senior secured rating on KPP and the 'BB-'
senior secured rating on TOILP to reflect our view that after a period of weak
performance, we expect operations to stabilize sufficient to meet the
availability and capacity requirements under the electricity manufacturing
agreement (EMA), which supports the project's credit profile.
On Dec. 19, 2012, Standard & Poor's Ratings Services revised its outlook to
stable from negative and affirmed its 'BBB-' rating on Kiowa Power Partners
LLC's (KPP) $642 million senior secured bonds ($340 million currently
outstanding) due in 2013 and 2021.
At the same time, Standard & Poor's revised its outlook to stable from
negative and affirmed its 'BB-' rating on Tenaska Oklahoma I L.P.'s (TOILP)
$73.5 million senior secured bonds ($19.89 million currently outstanding) due
in 2014.Tenaska Oklahoma pays debt with distributions from KPP. The '1'
recovery rating on TOILP is unchanged.
The outlook revision reflects our view that operations for the project have
now stabilized. Since its forced outage in June 2011, the project has not
experienced any major operational issues to date. As of Sept. 30, 2012, the
peak and off-peak availabilities were 99.22% and 98.85% for Power Block I and
98.47% and 98.73% for Power Block II for the contract year beginning May 1,
2012. In the last year, the project acquired compressor coverage for its units
that covers planned and unplanned maintenance on the compressors, further
mitigating operational risk. These developments are in addition to the
resolution of the project's tax dispute settlement that we noted in our
rationale earlier this year.
The debt service coverage ratio (DSCR) improved to 1.35x for the trailing 12
months ending Sept. 30, 2012, up from 1.27x for year-end 2011, in line with
budget and comparable to historical levels. The consolidated DSCR improved to
1.17x for the 12 months ended Sept. 30, 2012 as compared with 1.10x for
While the settlement resulted in taxes that average approximately 230% of the
original forecast, the project will likely pay around $4.1 million annually
going forward. This, along with the originally contemplated decreased capacity
pricing following the extension of its EMA, will result in DSCRs between 1.3x
and 1.35x through 2015. Favorably, in 2016, the project debt service
decreases, leading to improved coverage ratios throughout the term of the debt
for KPP. Although TOILP does not benefit from the lower debt levels in later
years at KPP, we believe stabilized operations at KPP will generate adequate
cash flows for the next two years to support TOILP's current rating.
TOILP is the holding company of KPP. KPP is a 1,220 megawatt (MW)
combined-cycle gas-fired power plant located in Pittsburg County, Okla., that
sells capacity and energy under an 18-year EMA with Shell Energy North America
(US) L.P. (SENA; A-/Stable). Shell Oil Co. (AA/Stable/A-1+), fully guarantees
SENA's obligations under the EMA, subject to a limit of $1.325 billion
amortizing in line with the bonds' scheduled redemption profile. Neither
entity guarantees the bonds.
Project liquidity is addressed through a six-month debt service reserve
account funded through a letter of credit (LOC) in place at both KPP and
TOILP. KPP also has a $5 million working capital facility in place. As of
Sept. 30, 2012, no funds have been drawn from either the working capital
facility or debt service reserves.
The stable outlook reflects our view that project operations have improved to
adequately meet availability and capacity requirements under the EMA, which we
expect will provide a stable revenue stream. Although we anticipate the
coverage to remain between 1.3x and 1.35x for the next three years based on
our revised property tax expectations,improved metrics driven by lower debt
service in later years, together with a stabilized operational profile,
remains weakly sufficient to support the ratings. We could lower the ratings
or revise the outlook to negative if operational problems resurface at the
facility such that the DSCR drops below 1.3x for a sustained period. We could
raise the rating if DSCRs are consistently more than 1.6x through the term of
the debt. With respect to the holding company rating, the stable outlook on
TOILP reflects that of KPP. A revision in the KPP rating or outlook would
result in a step-wise change for TOILP.
Related Criteria And Research
-- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007
-- Project Finance Construction and Operations Counterparty Methodology,
Dec. 20, 2011
Ratings Affirmed/Outlook Revision/Recovery Rating Unchanged
Kiowa Power Partners LLC To From
Senior Secured BBB-/Stable BBB-/Negative
Tenaska Oklahoma I L.P.
Senior Secured BB-/Stable BB-/Negative
Recovery Rating 1 1