Longview Power, LLC -- Moody's upgrades Longview Power, LLC 's senior secured term loan to B3 from Caa1; outlook is stable

Rating Action: Moody's upgrades Longview Power, LLC 's senior secured term loan to B3 from Caa1; outlook is stableGlobal Credit Research - 18 Aug 2022Approximately $40 million of term debt affectedNew York, August 18, 2022 -- Moody's Investors Service, ("Moody's") has upgraded Longview Power, LLC's (Longview or Project) $40 million senior secured term loan (Exit Facility) due July 2025 to B3 from Caa1. Longview's rating outlook is stable.RATINGS RATIONALEToday's rating action reflects Longview's overall improving credit profile due to improving wholesale power prices in PJM Interconnection, L.L.C. (PJM, Aa2 stable), which has considerably improved Longview's cash flows since the second half of 2021, and reflects Moody's expectation that Longview will likely continue to benefit from higher power prices in 2022 and 2023 based on the current forwards. These favorable market conditions have improved the Project's liquidity and overall financial flexibility which should enable it to repay its existing term loan sooner than previously anticipated.The increase in power prices, along with Longview's ability to lock in substantial proportions of its coal supply under lower fixed price contracts for its 2022 coal supply and partially for its supply in 2023, will lead substantial free cash flow generation, despite decreasing capacity prices based on the PJM Base Residual Auction (BRA) during this time period. For example, Longview's EBITDA has increased to approximately $45 million in FY 2021 from approximately $14 million in FY 2020. The project EBITDA is expected to increase substantially to approximately $173 million in 2022 based on current robust power prices in the PJM RTO. Longview's credit metrics relative to the restructured Exit Facility reflects a DSCR of 3.1x, CFO/Debt of 31%, and a Debt/EBITDA level of 1.3x in 2021, with these metrics expected to improve substantially in 2022.Longview's improving cash flows and credit metrics are also a result of lower priced coal supply contracts secured for 2022 and part of 2023 relative to a rising coal market pricing environment. The Project is fully contracted for its coal requirements in 2022 and partially contracted for its 2023 requirements at coal prices which are substantially below current high market prices.The rating further reflects Longview's sound operating performance, with plant availability steadily increasing since 2018, reaching 97% in 2020 and 91% in 2021. Longview has made substantial progress in recent years after experiencing chronic operational related issues following initial commissioning. The annual capacity factor for Longview has remained above 80% over the three year period ending December 2021, reflecting its operating profile as a steady baseload generating unit with a comparatively lower heat rate of 8,600 btu/kWh, in a market where higher cost and inefficient coal fired generation units are being retired, and the project's efficiency remains competitive with combined cycle gas fired generators on an all-in cost basis.The rating upgrade further acknowledges the steps taken by the current management team to improve operational performance and project liquidity. We recognize the benefits of management's decision to opportunistically reduce and exit prevailing power hedges in 2021 and 2022 to preserve cash collateral which otherwise would have adversely strained Longview's liquidity position. The high cost of unwinding hedges have been offset by cash flows generated from energy sales, benefitting from the increased power prices seen during the latter half of 2021 and year to date though the summer months of 2022.Given improved operating cash flows, Longview's liquidity position has improved substantially with approximately $71 million of cash and cash equivalents on hand at December 2021, and an additional $10 million of restricted cash, with cash balances increasing further in the months since. While the structure of the Longview credit facility does not include a debt service reserve fund or other external sources of liquidity, the Project's substantial cash position relative to its required debt service levels partially offsets this structural weakness.Longview performed its major maintenance outage related to its boilers during the late Spring months in 2022, funding approximately $41 million of major maintenance costs and capital expenditure with cash generated internally. The next major overhaul is expected to be in 2024 that would include plans to replace the high pressure section of the plant turbine as part of its 10-year major overhaul.The Project emerged from bankruptcy in August 2020 with a substantially lower debt quantum of $40 million. Under the terms of the financing, the Project has the right to exercise a payment-in-kind (PIK) interest of 5% annually, which reduces cash debt service to about $2 million a year but increase the final debt repayment obligation to approximately $52 million, reflecting a 30% premium. While the term loan does not mature until 2025, management anticipates repaying nearly 50% of the outstanding amounts of the credit facility during the 3rd quarter of 2022, with the remaining amounts expected to be repaid during the 1st quarter of 2023 from anticipated excess free cash flow. However, this repayment plan remains vulnerable to event risks such as a sudden forced outage requiring the utilization of internally available cash liquidity. Furthermore, while Longview's financial performance is forecasted to be strong through at least the first quarter of 2023, the credit profile also considers the high coal prices expected during the remainder of 2023 when the Project is more exposed to market coal prices, and the expectation of a significant drop in cash flows starting 2024 as energy prices are expected to moderate from current robust levels. We anticipate the longer term run rate of the Project's annual EBITDA to be reflective of the levels achieved in 2021, at approximately $45 million.Longview's ESG Credit Impact Score (CIS) of 5 acknowledges that ESG considerations are key driver to our view of Longview's credit profile and having a very highly negative impact on Longview's rating. As a single asset merchant coal generator, Longview is highly exposed to environmental risks, including exposure to carbon transition risks, and faces highly negative demographic and social trends relating to coal fired power generation. Furthermore, rising investor concern regarding ESG considerations also impact Longview's ability to attract capital going forward. However, Longview is somewhat insulated from near term carbon emission related cost pressure given its location in West Virginia, which is unlikely to pass legislation requiring carbon emission limits in the near future. Furthermore, to the extent that Pennsylvania joins the Regional Greenhouse Gas Initiative (RGGI), Longview will have a cost advantage and will also benefit from RGGI related market energy pricing premiums as regional wholesale market prices should increase if Pennsylvania joins RGGI. RATING OUTLOOKThe 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 substantial levels of cash flow in 2022 and in 2023. The stable outlook further incorporates the current robust wholesale power price environment, providing a higher degree of cash flow stability, enabling the project's ability to repay its term debt substantially ahead of its maturity date.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGFactors that could lead to an upgrade:Given the recent upgrade, prospect for a further upgrade is limited. Over the longer term, Longview could be upgraded if it is able to manage its carbon transition risk while ensuring strong liquidity and robust financial performance on a sustained basis post 2023.Factors that could lead to downgrade:The rating could be downgraded if anticipated cash flow and liquidity levels weaken from current expectations, which could occur if the plant experiences unforeseen operational problems or if wholesale market economics unexpectantly worsen. A downgrade could also occur if changes to the regulatory environment where Longview operates impact its ability to generate cash flow or limits its ability to repay its debt obligations when due.ISSUER PROFILELongview Power is a special purpose entity that owns and operates a 700 MW supercritical pulverized coal-fired power plant located in Maidsville, West Virginia, just south of the Pennsylvania border and approximately 70 miles south of Pittsburgh, PA. The Longview Power project is owned by a private equity group that largely represents the private lenders that took ownership of the project following its bankruptcy filing in 2020. The Exit Facility was established as part of Longview's April 2020 emergence from bankruptcy, and related debt restructuring which transferred the project's ownership to the senior secured lenders.The principal methodology used in this rating was Power Generation Projects Methodology published in January 2022 and available at https://ratings.moodys.com/api/rmc-documents/361400. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.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 https://ratings.moodys.com.Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. M. 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