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Longview Power, LLC -- Moody's assigns Caa1 to Longview Power, LLC 's $40 million senior secured term loan; outlook is stable

·17 min read

Rating Action: Moody's assigns Caa1 to Longview Power, LLC 's $40 million senior secured term loan; outlook is stable

Global Credit Research - 27 Jan 2021

New York, January 27, 2021 -- Moody's Investors Service, ("Moody's") has assigned a Caa1 rating to Longview Power, LLC's (Longview or Project) $40 million senior secured term loan (Exit Facility) due July 2025. The Exit Facility was established as part of Mountain State Energy Holdings LLC's (formerly known as Longview Intermediate Holdings C LLC) July 2020 emergence from bankruptcy, and related debt restructuring which saw the transfer of ownership to senior secured lenders. Longview's rating outlook is stable.

The terms of the Exit Facility provided an initial $20 million to the Project at close with the remaining proceeds held in a trust and slated for release to the Project in mid-2022. The Project is permitted to use up $15 million of the loan proceeds for Cash Collateral as well as for general corporate purposes and covering loan expenses.

The project owns and operates a 710 MW supercritical coal-fired power plant located near Morgantown, West Virginia, and commenced operations in 2011.

RATINGS RATIONALE

The Caa1 rating reflects Longview's overall weak credit position due to weak wholesale power prices in PJM Interconnection, L.L.C. (PJM, Aa2 stable). The PJM region is plagued by persistent excess capacity, tepid electric demand and sustained low natural gas prices, all of which compress electric energy margins. As a merchant coal-fired generation power plant, Longview faces elevated carbon transition risk, with the potential for adverse federal policy for the US coal power industry and rising investor concern regarding ESG considerations contributing to heightened refinancing risk for the project. The rating incorporates the change in ownership that occurred following the issuer's emergence from bankruptcy including the governance of the organization, which we view as appropriate.

The rating level also acknowledges the substantially lower debt quantum at Longview following the Project's bankruptcy, where debt was reduced to $40 million from approximately $356 million pre-bankruptcy. While lower debt levels are supportive of credit quality, the Project's ability to generate material free cash flow is hampered by significant major maintenance and capital spending needs totaling $119 over the loan life as well as by high interest costs amid a weak power pricing environment. These expenditures are in part driven by plans to replace the high pressure section of the plant turbine in 2024 as part of its 10-year major overhaul. The existing turbine will be retained as a spare, and possibly repaired if the Project has the available internal resources.

The credit agreement stipulates annual average debt service of approximately $5.1 million over the 2021-2024 period, with a principal payment of $52m in year 2025. These sums include a 30% repayment fee on debt service. The Project has the right to exercise a payment-in-kind (PIK) interest of 5% annually, which reduce debt expenses by about $2 million a year but would also increase the final debt obligation. The Exit Facility is secured by substantially all of the assets of the Guarantors, including Mountain State Energy Holdings LLC's, subject to certain subsidiary exclusions. As part of the reorganization, a third party has determined an enterprise value for Longview of approximately $110 million. In addition to the aforementioned senior secured debt, other obligations include a $4.2 million capex loan and a $2.6 million LNG facility loan ($2.6m). Several of the financial metrics when including required capital investments in the calculation align with the Caa rating category.

Liquidity at the project is adequate. The Project's unrestricted and restricted cash balances as of December 31, 2020 were approximately $43 million and $47 million, respectively. The absence of a debt service reserve fund is a credit weakness, though this is offset somewhat by the level of restricted cash, which includes $20 million held in trust, as well as the current level of unrestricted cash. One condition precedent for the release of the monies held in trust is the presence of a minimum of $20 million in available liquidity at the Project.

In April 2020, the project amended its coal contract with Contura Coal, reducing the term of the contract to December 31, 2022, while also lowering the per unit price, which will enhance annual cash flow. For both 2021 and 2022, the project can receive up to 1.8 million tons, which coincides with the expected amount needed for a given year. Post-2022, Longview expects that the level of excess of coal supply in the market will prevent any material increase in higher coal costs. We also note that PJM will be conducting its capacity auction in May 2021 and in November 2021, which will provide greater visibility into the reliability of the Project's future financial performance.

Positively, the asset's operating performance has been sound in recent years, with annual capacity and availability factors above 85% since 2018. Performance through the first three quarters of 2020 was satisfactory, with average availability at 96.7%, roughly 3 percentage points above budget. Capacity factors have generally been strong owing to the plant's competitiveness. We note the capacity factor has declined to 77.6% during the second quarter 2020, primarily because of 745 hours of Reserved Shutdown hours that occurred during Q2, which were used to perform scheduled maintenance work, as well as off-peak cycling in Q1 and Q3. We expect the annual capacity factor to rebound with Q4 results.

RATING OUTLOOK

The stable outlook incorporates the view that plant operations will remain steady, and the project will maintain its relative competitive position in the PJM market, producing cash flows consistent with our base case expectations. The outlook further incorporates the current low merchant price environment, which we believe will persist over the foreseeable future.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Factors that could lead to an upgrade

In light of the potential refinancing challenges and related ESG investor concerns, prospects for a rating upgrade in the near term are limited. The rating could be upgraded if the Project demonstrates substantially stronger cash flows that allow it to more rapidly de-lever or accumulate cash. This could occur if the next two upcoming PJM capacity price auction results are higher than expected and if weather or demand conditions drive higher power prices in PJM.

Factors that could lead to downgrade

The rating could be downgraded if anticipated cash flow and liquidity levels weaken, which could occur if the plant experiences operational problems or if wholesale market economics worsen. A downgrade could also occur if changes to the regulatory environment where Longview operates impacts its ability to generate cash flow or limits its ability to remain a going concern over the medium term.

ISSUER PROFILE

Longview Power is a special purpose entity that owns and operates a 710 MW supercritical pulverized coal-fired power plant located in Morgantown, West Virginia, just south of the Pennsylvania border and approximately 70 miles south of Pittsburgh, PA. The project Energy and capacity is sold on a merchant basis into PJM's wholesale energy and capacity markets. Coal for the project is purchased from third-party providers via long-term contracts following the closure of Longview's Mepco mine-mouth operations in March 2018. Water for the project is drawn from the Monongahela River, via a pipeline and treatment facility constructed by Dunkard Creek Water System LLC (Dunkard), another Longview affiliate. Mepco and Dunkard are both subsidiaries of Longview's parent, Mountain State Energy Holdings, LLC, and are part of the collateral package pledged to the Longview lenders. In October 2020, Longview Intermediate Holdings C LLC changed its name to Mountain State Energy Holdings LLC.

The principal methodology used in this rating was Power Generation Projects Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1236893. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gayle Podurgiel Asst Vice President - Analyst Project Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 A.J. Sabatelle Associate Managing Director Project Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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