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Related Issuers
Rating Action:

Moody's places Elwood's Ba2 rating under review for possible downgrade.

Global Credit Research - 30 Apr 2013

Approximately $196 million of securities affected

New York, April 30, 2013 -- Moody's Investors Service placed Elwood Energy LLC's (Elwood or Project) Ba2 senior secured bond rating under review for possible downgrade.

RATINGS RATIONALE

The review for possible downgrade considers the expected sale (the "Transaction") by Dominion Resources (Dominion, Baa2-stable) of its 50% interest in Elwood to EquiPower Resources (EquiPower, Ba3 (1st lien, under review for possible downgrade). We previously viewed Dominion's substantial ownership in Elwood to be materially credit supportive especially given the affiliate relationships and Dominion's strong investment grade profile. As part of its ownership of Elwood, Dominion backed half of Elwood's 6-month debt service reserve, provided a $10 million working capital facility, and provided operations and maintenance services. Once the Transaction closes, we understand EquiPower will step into the Dominion's roles as described above and EquiPower will support its obligations with letters of credit issued by its expected upsized revolver. The Transaction is expected to close before the end of the second quarter of 2013. J-POWER USA Generation, L.P which owns the other 50% of Elwood is expected to maintain its ownership in Elwood.

Importantly, if the 50% ownership sale of Elwood by Dominion is completed as expected, we anticipate Elwood's senior secured rating to be downgraded one notch to Ba3 from Ba2.

Moody's also recognizes the revision to Elwood's major maintenance deposit schedule in late 2012 to a start-based scheme, which in and of itself would not have resulted in a rating action. In our view, however, the revised schedule does create greater uncertainty regarding the availability of major maintenance funds starting around 2020 especially since Elwood's cash flow starting in 2017 is mostly uncertain at this time. Elwood's existing contracts mature around the 2016/2017 timeframe for four units while its remaining 5 units benefit from PJM RTO capacity prices that is known through April 2016. We understand the project is considering changes to its long term major maintenance contracts, which could materially reduce long term costs.

After the sale is completed, we expect the likely Ba3 rating for Elwood to reflect Elwood's weak competitiveness given its high heat rate and its reliance on PJM RTO capacity payments for nearly all of its cash flow. PJM's RTO capacity payments have been highly volatile ranging from a low of $17/MW-day to a high of $174/MW-day.

That said, Elwood's credit quality remains supported by strong historical operational performance, Elwood's contracts on four units through August 2016/2017, and known capacity prices through May 2016 that should enable the Project to achieve an average of 2.2 times debt service coverage through 2016. Additionally, project finance protections including a forward looking cash trapping mechanism are supportive of credit quality.

While Elwood's ratings are likely to decline by one notch if the Transaction is completed, the Project's rating is likely to be confirmed in the unlikely event that the sale does not proceed and Dominion maintains its ownership stake and affiliate relationship with Elwood.

Elwood Energy LLC (Elwood) owns a 1,469 megawatt (MW) peaking facility consisting of nine 156.5 MW natural gas-fired, simple cycle units, located in Elwood, Illinois (about 50 miles southwest of Chicago). Elwood sells its energy and capacity under a power sales agreement (PSA) with Exelon Generation (ExGen: Baa2, stable) that expires in 2016 and 2017.

Elwood is 50% owned by a subsidiary of Dominion and 50% indirectly owned by J-POWER USA Generation, L.P. (J-Power Gen), which is a 50/50 joint venture between John Hancock Life Insurance Company and J-POWER USA Investment Co., Ltd.

The last rating action on Elwood occurred on May 1, 2012 when Moody's downgraded Elwood's rating to Ba2 from Ba1 and changed the outlook to stable from negative.

The principal methodology used in this rating was Power Generation Projects published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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.

Clifford J Kim
Vice President - Senior Analyst
Project Finance
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Chee Mee Hu
MD - Project Finance
Project Finance
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's places Elwood's Ba2 rating under review for possible downgrade.
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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