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Rating Action:

MOODY'S ASSIGNS Baa2 SENIOR SECURED RATING TO DEBT SECURITIES OF POWER CONTRACT FINANCING, LLC

09 Jun 2003
MOODY'S ASSIGNS Baa2 SENIOR SECURED RATING TO DEBT SECURITIES OF POWER CONTRACT FINANCING, LLC

Approximately $840 Million of Securities Affected

New York, June 09, 2003 -- Moody's Investors Service assigned a Baa2 rating to $840 million of senior secured bonds to be issued by Power Contract Financing, L.L.C. (PCF). The rating outlook is stable. PCF is a funding vehicle formed by Calpine Energy Services, L.P. (CES), a subsidiary of Calpine Corporation (CPN), to monetize a power purchase agreement (PPA) with the California Department of Water Resources (CDWR, rated A3).

The rating reflects the stability and predictability of PCF's cash flow, which will be derived from a power sales contract to CDWR. The rating reflects the credit strength of CDWR as the offtaker, and the credit strength of Morgan Stanley Capital Group (MSCG) as the contractual supplier of power. The rating also incorporates Moody's view of PCF as a separate special purpose entity that would not be expected to be substantively consolidated under a bankruptcy scenario for Calpine Corporation, which has a senior unsecured rating of B1. PCF's limited liability company agreement will contain provisions customarily found in connection with bankruptcy remote entities, including a requirement that all of PCF's managers (some of which will have independence from PCF) consent to any action to commence or consent to a Chapter 11 proceeding.

The transaction relies on CDWR for payments for capacity and energy charges, with debt service proceeds being derived from the margin between funds received under this contract and funds paid to Morgan Stanley Capital Group (MSCG) under a back-to-back mirror PPA. CDWR will pay PCF a fixed price of $58.60 per MWh for baseload electric energy delivered, for the term of the power sales agreement. In addition, CDWR will also pay PCF $12.50 per kW-month, from closing through December 31, 2003, for making 400 MW of electric energy made available to CDWR, regardless of whether CDWR exercises its right to take the additional flexible electric energy.

PCF's rating reflects the ability of CDWR to novate the contract to a Baa2 issuer and the stated intention of CDWR to do so. The rating reflects Moody's concern that broad challenges to long term power sales contracts in California might result from the various investigations of market conditions, or that CDWR might challenge the sale or assignment of the CDWR contract or might seek to terminate the CDWR power sales agreement. The rating also considers the probability, believed to be remote, of a significant force majeure event in the western power market.

In assigning the Baa2 rating, Moody's also considered the tight debt service coverage ratios (1.01 times coverage) in the transaction, leaving little room for unexpected events. This risk is mitigated to some extent, by the contractual obligations under the Amended PPA and the priority of CDWR's payment obligations under its indenture, which are classified as Priority Contract Costs. The PCF bonds are secured by all of PCF's material agreements and accounts. Also incorporated into the rating is the liquidity enhancement provided by a 6-month maximum debt service reserve.

PCF is a limited liability company without physical assets. In order to satisfy its contractual obligations under the PPA, PCF entered into a back-to-back mirror PPA with Morgan Stanley Capital Group. PCF will rely upon MSCG to schedule and deliver energy and capacity. The terms and conditions under the mirror PPA substantially match those under the Amended and Restated PPA.

MSCG's ability to meet its contractual delivery obligations is enhanced by the flexibility to source power anywhere within the WECC, the option to procure energy from certain power purchase agreements between CES and third parties that will be assigned for the benefit of MSCG, the flexibility to deliver power at any delivery point along the NP15 of the WECC, and the depth and liquidity of the WECC market. MSCG's failure to deliver scheduled energy obligation is only excused under force majeure events. Market price risk, of whether MSCG can source power at or below the contractual $40.40/MWh, is borne by MSCG. More importantly, MSCG's credit strength lies with the irrevocable and unconditional payment guarantee provided by its Aa3 rated parent, Morgan Stanley.

Without any physical assets and employees, PCF is a funding vehicle owned by Calpine Energy Services, L.P., a subsidiary of Calpine Corporation.

A more detailed pre-sale report will be available to investors.

New York
A.J. Sabatelle
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Daniel Gates
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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