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Rating Action:

Moody's Assigns Ba3 Rating to KGen LLC; Outlook Stable

18 Jan 2007
Moody's Assigns Ba3 Rating to KGen LLC; Outlook Stable

Approximately $400 million of debt securities affected

New York, January 18, 2007 -- Moody's Investors Service assigned a rating of Ba3 to KGen LLC's (KGen or the borrower) new $400 million senior secured credit facilities. The facilities consist of a $200 million 1st lien term loan due 2014, a $120 million synthetic letter of credit facility due 2014 and an $80 million working capital loan facility due 2012. The facilities will be secured by the KGen portfolio of its Murray, Hinds, Hot Spring combined cycle and Sandersville simple cycle facilities on a 1st lien basis. The rating outlook is stable.

In December 2006, KGen Power Corporation, a newly formed company, raised approximately $777 million of equity from a group of investors in a private placement offering. KGen Power Corporation intends to use a portion of these equity proceeds along with the $200 million term loan offering to: (1) purchase KGen Partners LLC, the sole owner of KGen LLC from current owners (2) repay the remaining balance of KGen LLC's $475 million facilities issued in March 2005, and (3) provide cash to KGen LLC in excess of $50 million for working capital purposes.

The Ba3 rating of the new facilities reflects the relatively low level of leverage at approximately 24% debt to pro forma capitalization and $66/kw of funded debt. This level of leverage compares favorably with the existing leverage of the project company and compares better than other recent combined cycle portfolio financings with 1st lien ratings of Ba3. Nevertheless, the benefits of this lower leverage are still offset by the considerable uncertainty and volatility associated with a predominantly merchant generating portfolio stemming from seasonal cash flows and exposure to market concentration.

The lower pro forma debt load will result in relatively good credit metrics in comparison to other merchant generation financing structures. While Moody's anticipates average funds from operations (FFO) to debt ratio to be negative in the first two years following the transaction due to the substantial major maintenance costs anticipated during this period, the FFO to debt ratio is expected to improve to 15% or better thereafter, under various market scenarios; a level that is consistent with a Ba rating for projects with significant merchant revenue exposure. The debt service coverage ratio (DSCR), based on interest expense and a 1% per annum scheduled amortization of the term loan, is expected to remain greater than 1.4x on average through the life of the loans based on the various market scenarios analyzed by Moody's.

The rating also reflects the concentration of KGen's assets in a market that has, in Moody's view, weak fundamentals for merchant operators. The KGen portfolio operates in the Southeastern Electric Reliability Council (SERC) wholesale power market where reserve margins remain high due to overbuilding in recent years and the slow pace of retirements of older generation units by the incumbent utilities. Lower cost coal and nuclear power together currently account for 54% of the region's capacity and constitute base load production in the region. While KGen's combined cycle units are generally dispatched on a load following basis and have a reasonable expectation of being dispatched during peak summer demand periods at capacity factors that reflect an intermediate dispatch profile, KGen's seasonal cash flows could be subject to considerable volatility.

In Moody's view, a key strength of the proposed new financing is the existing PPA currently in place with Georgia Power at the 630MW Murray I generating facility. This contract, which is expected to generate revenues of approximately $50 million per annum through 2012, provides a good base for cash available for debt service.

The proposed financing structure has a number of project-like features including a cash flow waterfall with segregated accounts, cash funded reserves and a 50%-75% cash sweep requirement. Additionally, the rating reflects several structural benefits that include a requirement to cash fund and maintain at all times a six month debt service reserve, a twelve-month major maintenance reserve and a minimum $50 million required cash balance before distributions can be effected. The proceeds of the debt and equity financing will initially fund a liquidity basket in excess of $50 million and additional liquidity will be available through the $80 million revolving credit facility.

At approximately $66/kw on the basis of the funded term loan, the lenders will benefit from a significant level of collateral protection. The proposed equity offering values the transaction at approximately $250/kw. Furthermore, in contrast to this potential market value, Moody's estimates that new construction for gas fired combined cycle units could be significantly higher in the range of $600 to $700/kw.

KGen's stable outlook reflects the cash flow protection provided by the capacity payments from the Georgia Power PPA and the expectation that merchant margins, if sustained at levels which are at least consistent with recent performance, could provide comfortable coverage of scheduled debt service, with cash funded reserves available to fund planned upfront major maintenance costs.

The rating is predicated upon final documentation being consistent with Moody's current understanding of the transaction structure. Moody's will withdraw the B2 first lien rating and B3 2nd lien rating on KGen's existing term loans upon closing of the recapitalization.

Based in Houston, Texas, KGen LLC is a power generating company formed in 2004 as a vehicle to purchase and hold a portfolio of power generation assets from Duke Energy. KGen will own four power generation facilities with a combined capacity of 3,030 megawatts and include Murray I and II combined cycle facilities and Sandersville simple cycle facility located in Georgia, Hinds combined cycle facility in Mississippi, and Hot Springs combined cycle facility in Arkansas.

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

New York
M. Sanjeeva Senanayake
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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