-- Yellowstone Energy L.P. is issuing $123 million senior
secured notes supporting its 54-megawatt petroleum-coke-fueled
circulating fluidized bed power plant located in Billings, Mont.
-- Bond proceeds from this issuance, along with
approximately $20 million of cash, will be used to refinance
existing senior debt, fund a number of reserve accounts, settle
a number of claims on defaulted subordinate and deferred
creditor debt, and pay for replacement of the plant's
underperforming air-cooled condenser.
-- We are assigning our preliminary 'BBB-' rating to the
notes, with a stable outlook.
On Nov. 15, 2012, Standard & Poor's Ratings Services
assigned its 'BBB-' preliminary rating to Yellowstone Energy
L.P.'s (YELP) $123 million senior secured notes due 2027. The
outlook is stable. The bonds are backed by revenue from YELP's
circulating fluidized bed (CFB) power generation facility, which
has been in operation since 1995. Assignment of a final rating
is conditional on our receipt and review of executed
documentation. The final rating could differ if any terms change
The rating on YELP's $123 million senior secured bonds is
'BBB-'. The outlook is stable.
The YELP project is a CFB power plant located in Billings,
Mont., on a 10-acre site adjacent to an ExxonMobile (Exxon)
refinery. Its fuel source is pet coke that is produced as output
waste from three local oil refineries. It burns the pet coke
together with crushed limestone, which helps to capture sulfur
emissions. The plant produces electricity, steam, and ash. The
project has one general partner, Billings Generation Inc. (BGI),
and one limited partner, Exxon Billings Cogeneration Inc.
(EBCI). EBCI is ultimately owned by ExxonMobil.
The project is set up as a special purpose entity (SPE) and
is not linked to the credit strength of any parent. Rosebud
Operating Services Inc. has operated the plant through the
plant's entire life. The project has been operating since 1995,
and the proceeds of this debt issuance will refinance existing
senior debt, settle a number of subordinate debt claims that are
in default, and fund construction of a new air-cooled condenser.
The plant has a nominal generation capacity of 54 megawatts
(MW) and sells all electricity generated under a take-and-pay
power purchase agreement (PPA) with NorthWestern Corp.
(BBB/Stable/A-2). The PPA has three energy blocks, with 85% of
54 MW sold at a rate of $83 per MW-hour (MWh) in 2012. This rate
will be adjusted annually by an average of 4.6%. The next 8% is
sold at a fixed price of $38 per MWh, and the remainder sold at
Mid-C market prices. The price of energy includes a fixed-price
capacity payment that was $6.65 per kilowatt per month in 2012
and that increases by an annual average of 3.5%.
We consider fuel supply and operational reliability the key
risks to timely debt service.
We see two possible weaknesses in fuel supply for the plant:
first, whether the refineries will continue to produce
sufficient fuel for the project, and second, whether the
non-Exxon refineries will choose to sell to YELP. Although Exxon
is obligated to supply pet coke to YELP through 2028 so long as
it is operating, the other two refineries could raise their pet
coke input prices for YELP at the end of their short- to
medium-term contracts or market their supply elsewhere.
With three highly creditworthy refineries in the Billings
area, the total local pet coke supply exceeds the plant's
maximum need by about 3x. The contract with Exxon is a
particular strength, in that Exxon supplies approximately half
of the fuel needs for no cost so long as the Exxon refinery
continues to operate at historical volumes. The additional
strength of this contract is that Exxon is obliged to supply all
its pet coke to YELP. The Exxon refinery has operated since
YELP has obtained fuel from Phillips66 and CHS Inc. at
prices of negative $8 to $18 during the past 10 years. YELP is
exposed to fuel price and volume risk over multiple contract
renegotiations during the debt's 14-year term. The price of pet
coke in parts of Asia has been high and somewhat volatile, and
allows for a possible alternative market for pet coke from
Billings, despite the substantial cost of transport to
destinations in Japan, China, India, or Southeast Asia. CHS has
been disposing of at least a portion of its pet coke to those
destinations. We see the project able to break even with local
pet coke prices of $70 to $90, depending on the volume of fuel
coming from Exxon.
A related risk is the possibility of refinery closures. The
three refineries are in a strong economic position, with
plentiful crude oil supply from Canada and Wyoming, limited
competition in the Rocky mountain region, and some geographic
isolation as a result of limited pipeline capacity and sheer
distance from larger refineries on the East and West coasts and
the Gulf Coast of the U.S. We anticipate that this strong
position will continue for at least the next five years, but the
situation may weaken during the term of YELP's debt. However,
our analysis assumes that YELP, at the current rating, will find
at least one of the refineries in service through the 14-year
debt term, and our downside case contemplates that YELP will
meet shortfalls in pet coke fuel with coal, although doing so
would expose the project to coal price risk.
Specifically, our downside fuel stress scenario has Exxon
continuing to produce historical volumes of pet coke while YELP
is forced to burn coal for the other 50% of its fuel needs
because of either refinery closure or a large increase in market
prices for pet coke. In this stress scenario, we also assumed
diesel fuel prices increase substantially along with coal
prices. The presence of four other large coal mines within the
same distance from Billings as the backup coal supplier means
the project is not tied to the backup coal supplier's
speculative-grade credit strength. We project that the project
would be able to fully service debt under this scenario.
The other main risk to the project is operational
reliability. The plant commenced operations with a number of
unresolved construction issues. Management and the independent
engineer (IE) attribute most of these problems to an
engineering, procurement, and construction (EPC) contractor that
filed for bankruptcy during construction and left some work
items incomplete. Although a lot of capital investment and
remedial work has been completed in recent years and the plant
is now operating much more efficiently, two unplanned outages in
2008 and 2010 led to reduced capacity factor in those years.
Other than these two outages, the plant has been running at 90%
to 95% capacity for the past eight years. However, liquidity has
been sized to mitigate the risk of additional outages and
consists of a debt service reserve, operations and maintenance
(O&M) reserve, and sufficient major maintenance reserves to
cover likely levels of unscheduled outages. Only one major
capital project remains -- the replacement of the air-cooled
condenser -- and with this investment the project should be
positioned to sustain its projected operating performance.
Under the management base case scenario, debt service
coverage (DSC) is projected to be 1.5x in 2013 (a year in which
an extended outage is planned to replace the air-cooled
condenser). For the remainder of the debt term, the average is
2.04x, with a minimum of 1.73x. We looked at the project's
operations under a number of scenarios: a 10% decrease in
generation, a 20% increase in fuel and limestone costs,
replacement of half or all the pet coke with coal, a 50%
increase in O&M and major maintenance costs, an increase in
unplanned outages, and a decline or termination of ash sales and
other non-electrical-generation revenue.
The two major potential stresses for the project are large
increases in fuel costs and reductions in operational
performance, and our downside case simulates the combined impact
of both. In this scenario, O&M costs are 50% above pro forma,
generation is down 10%, fuel costs are up 20%, and ash sales are
down 20%. DSC is 1.25x in 2013 and averages 1.79x in subsequent
years, with a minimum of 1.59x.
The rating reflects our view of the following credit
-- The project has a strongly rated offtaker for electricity
(NorthWestern Energy), with no minimum generation or
availability thresholds and fixed prices.
-- There are three sources of pet coke in Billings, and no
other local consumers of this product. Exxon, the main coke
supplier, supplies coke at no cost.
-- The other two refineries have limited ability to store
pet coke onsite.
-- The project has a backup coal supply contract and the
plant can operate on a mix of pet coke and coal if insufficient
pet coke is available.
-- Exxon relies on YELP to meet current emission constraints
for sulfur at the refinery and thus has strong incentives to
perform under its contract.
-- Exxon relies on YELP for a significant portion of its
steam needs and the steam supply agreement does not have minimum
-- YELP offers the supplying refineries a local source of
coke disposal compared with other alternatives that require
long-distance transportation of pet coke.
-- Construction risk is minimal, with one major construction
item in 2013 and then ongoing maintenance.
-- The project has a fully amortizing debt profile and
robust forecast minimum and average DSC. The debt is scheduled
to be fully repaid two years prior to the end of the PPA.
-- The project has a 12-month forward- and backward-looking
distribution test of 1.25x.
-- The project has adequate liquidity, including a
nine-month debt service reserve, a 180-day O&M reserve, and a
major maintenance reserve. All three reserves are funded at
financial close, and the major maintenance reserve is maintained
at the higher of funding for the next year or a three-year
look-forward (40% in each year) basis.
We weigh these strengths against the following credit
-- The plant has faced high-cost maintenance items multiple
times in the past, although the IE believes that these issues
were mostly a result of poor initial construction from an EPC
contractor that went bankrupt. The IE anticipates that plant
efficiency will improve to 91% or more in 2013 and beyond,
relative to 88.5% during the past 10 years.
-- The plant relies on the adjacent Exxon for half of its
fuel. If Exxon closed its refinery, the project would face
increased fuel costs because it would have to purchase 100% from
-- Remaining fuel is purchased through short- and
medium-term contracts, exposing the project to price risk during
subsequent fuel contract negotiations.
-- Although coal is available as an alternative fuel (and
contracts are in place that ensure adequate supply), the plant
would be more expensive to operate on coal.
-- The PPA is mainly take-and-pay, with a relatively small
capacity payment, requiring high levels of actual generation to
earn maximum revenue.
-- The debt is a refinancing of existing debt; the project
is in default for its subordinate debt and settlement is still
being negotiated with at least one creditor. An escrow account
has been established in an amount sufficient, in our view, to
meet the obligation. And the escrow amount of $7.5 million is
approximately 10% above the disputed claim amount.
-- Pro forma projections assume higher-than-historical
capacity, lower fuel use, and lower limestone use than long-term
historical usage, although this anticipation is based on recent
capital improvements and resultant operational efficiencies.
The project has a number of cash-funded reserves that
provide short-term liquidity to enable the project to fund
somewhat cyclic operational and capital expenditures. The note
reserve contains nine months of debt service, the O&M reserve is
funded with 180 days of expenses, and the major maintenance fund
is funded with the higher of next year's spending or 40% of each
of the next three years funding.
As well, the project has a 1.25x 12-month forward- and
backward-looking distribution test.
The stable outlook reflects our view of the project's strong
PPA and highly rated offtaker that takes most energy at high
fixed prices and runs beyond the term of the debt. It also
reflects the three local pet coke fuel sources, which together
generate more than 3x YELPs' fuel needs each year. YELP is the
only local consumer of pet coke. The project is exposed to
potential increases in operating or fuel costs and the risk of
shutdown of one or more of the refineries. However, the YELP
plant has a 17-year operating history and a 10-year history of
pet coke purchases from Phillips66 and CHS, and the three
refineries are economically strong.
We believe the project has little potential for an upgrade
because of single-asset risk and fuel price exposure.
A downgrade of the project may occur if operating costs
escalate or plant performance falls below the level of the past
two years. The rating may also come under pressure if the plant
faces significant unplanned outages, or if local pet coke
volumes shrink or prices escalate substantially. A downgrade
would be likely if project DSC fell to less than 1.5x through
the debt term.
Related Criteria And Research
-- Updated Project Finance Summary Debt Rating Criteria,
Sept. 18, 2007
-- Project Finance Construction and Operations Counterparty
Methodology, Dec. 20, 2011
-- Criteria for Special-Purpose Entities in Project Finance
Transactions, Nov. 20, 2000 Ratings List New Rating Yellowstone
Energy L.P. $123 mil sr sec nts ser 2012 BBB-(Prelim)/Stable