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Announcement:

Moody's affirms Elwood's Ba1 rating and changes outlook to negative.

02 Feb 2011

Approximately $260 million of securities affected

New York, February 02, 2011 -- Moody's Investors Service affirmed Elwood Energy LLC's Ba1 rating on its senior secured bonds and changed the outlook to negative from stable.

RATINGS RATIONALE

The rating action reflects Elwood increasing exposure to low merchant capacity prices after 2012 and full merchant exposure in 2017. Starting in 2013, approximately five of Elwood's nine units will rely on PJM's capacity market unless the Project is successful in either extending the existing contract or entering into new contracts. Given Elwood's offtake contract maturities over the next 2-7 years and Elwood's bond maturity in 2026, the Project's rating is likely to decline by one or more notches over time unless the Project is able to execute new long term contracts or take additional actions to improve credit quality.

Moody's notes that PJM's capacity prices for the Project are low at around $10/kw-year for the most recent auction compared to approximately $52/kw-year pricing under the offtake contract with Exelon Generation (ExGen) and $60/kw-year under the offtake contract with Constellation Energy (Constellation). If the low level of prices continue into future auctions for periods beyond 2016, Elwood could incur cash flow shortfalls to service debt after 2016.

That said, the rating also takes into consideration the nearly two years period before maturity of the ExGen offtake agreement which provides significant time for the Project to seek a PPA extension or find a replacement. Additionally, Moody's expects Elwood to comfortably cover debt service from 2012 through 2016 based on the Constellation offtake agreements though the Project could experience a decrease in DSCR to below 1.4 times.

The negative outlook reflects the expected expiration of the ExGen PSAs at the end of 2012, low PJM capacity prices in the last two auctions covering the May 2012-April 2014 timeframe and potential difficulty in sourcing attractively priced replacement offtake contracts.

The Project's rating could stabilize or improve if Elwood is able to enter into new, long term PSAs with investment grade off-takers that have financial terms which result in annual DSCRs being at or above 1.4 times over the long term past 2012.

Elwood's rating could decline if Elwood is unable to replace or extend the ExGen PSA resulting in partial merchant exposure in 2012, PJM capacity prices remain at current low levels, Elwood incurs operational problems or either ExGen or CEG is downgraded below Ba1.

Elwood Energy LLC (Elwood) owns a 1,409 megawatt (MW) peaking facility consisting of nine natural gas-fired, simple cycle units of approximately 156.5 MW, 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: senior unsecured-A3, stable) that expires at the end of 2012, and under two PSAs with Constellation Energy Commodities Group, Inc. (Constellation), a subsidiary of Constellation Energy Group, Inc. (CEG: senior unsecured-Baa3 stable) that expire in 2016 and 2017. Constellation's obligation to make payments to Elwood under the PSAs is unconditionally guaranteed by CEG. Elwood is 50% owned by a subsidiary of Dominion Resources, Inc (DRI: Baa2 senior unsecured; stable outlook) 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 August 14, 2006 when Moody's upgraded Elwood's rating to Ba1.

The principal methodology used in this rating was Power Generation Projects methodology published in December 2008.

New York
Clifford J Kim
Vice President - Senior Analyst
Project & Infrastructure Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Chee Mee Hu
MD - Project Finance
Project & Infrastructure Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's affirms Elwood's Ba1 rating and changes outlook to negative.
No Related Data.
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