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17 Sep 2007
Moody's assigns Ba3 to TPF II LC credit facilities
Approximately $220 million of debt affected
New York, September 17, 2007 -- Moody's Investors Service assigned a senior secured rating of Ba3
to TPF II LC, LLC's (TPF II) proposed $180 million
term loan due 2014 and $40 million working capital facility due
2014. The outlook is stable.
Proceeds from the credit facilities, along with approximately $148
million of equity from TPF II, L.P. (Sponsor) will
be used to finance the acquisition by the Sponsor of two gas-fired
generating facilities in Illinois from affiliates of ArcLight Capital
Partners, LLC, DTE Energy Services, Inc.,
and Tyr Capital, LLC. The funds will also be used to pre-fund
a debt service reserve account and for transaction costs. The aggregate
generating capacity of the two facilities is 984 MW, consisting
of the 656 MW Lincoln Generation Facility (Lincoln) and the 328 MW Crete
Generation Facility (Crete).
The rating reflects the relatively high business risk associated with
simple-cycle natural gas peaking assets with high marginal costs
as demonstrated by heat rates at approximately 12,000 Btu/kWh.
The facilities are expected to run only during peak hours subject to seasonal
demand and weather driven volatility. This risk is offset by the
benefits provided by capacity contracts that partially support the cash
flows during the early years, the ability for the Project assets
to participate in the PJM Interconnection's Reliability Pricing
Model (RPM) capacity market structure and a manageable debt load resulting
in relative strong credit metrics, which are consistent with the
The Lincoln facility operates under a tolling agreement with Exelon Generation
Company that runs through May 2011, and the Crete facility operates
under a tolling agreement with DTE Energy Trading, Inc.,
that expires in May 2008. After the expiration of their tolling
agreements, both facilities are expected to benefit from capacity
revenues from the PJM Interconnection's RPM market structure,
which is expected to reduce a degree of the cash flow volatility that
would otherwise adversely impact merchant peakers. The PJM market
capacity price is set by an auction process under a regulatory market
design with a pricing structure envisioned to encourage new entry of generating
capacity when reserve margins fall to a target minimum level of reliability.
The Lincoln and Crete facilities operate in the PJM West market region
in the Commonwealth Edison (ComEd) Northern Illinois market sub region,
where reserve margins are expected to tighten. Under PJM's
market design, the capacity prices are set three years prior to
delivery, ensuring a degree of predictability for the Project's
cash flows once fully merchant. It is Moody's expectation
that the contractual capacity margins and the subsequent RPM based capacity
margins will provide over 90% of the Project's ongoing cash
flows, providing a degree of stability for debt service.
The rating is also constrained by the unproven nature of PJM's capacity
auctions with only two auctions held so far for the 2007/2008 and 2008/2009
planning years. The rating further incorporates the potential uncertainty
in Illinois surrounding retail rate making and the lack of clarity on
how this may impact the wholesale market in Illinois.
The rating reflects a financing structure with approximately 55%
of debt (or approximately $183/kw), in view of the meaningful
level of Sponsor equity of approximately $148 million funding the
approximately $316 million cash acquisition price. The rating
also reflects the expected operational oversight to be provided by Tenaska
and its track record as a highly experienced and proven developer and
operator in this market sector.
Given the comparatively lower debt load, the Project's credit
metrics compare favorably with other gas-fired merchant generating
projects rated by Moody's in the low Ba rating level. Based
on various capacity price, energy price and dispatch scenarios analyzed
by Moody's, the Project's DSCRs can be reasonably expected
to remain in excess of 1.8x in each year. However,
because the debt service coverage ratio reflects only a minimum 1%
amortization, Moody's views the ratio of funds from operations
(FFO) to total debt as a more relevant metric. The FFO to debt
ratio is expected to be in the range of approximately 10% to 15%
for the first five years of the project under various reasonable downside
scenarios. Moody's anticipates refinancing risk to be manageable
as a significant degree of debt pay down can be expected in view of the
Project's cash sweep mechanism even under a number of downside scenarios
analyzed by Moody's.
The Ba3 rating incorporates the project finance structural features benefiting
the lenders. The financing structure incorporates a project style
cash waterfall payment mechanism that will be administered by the collateral
agent. The ratings reflect the inclusion of a 6-month debt
service reserve that will be supported through the posting of a letter
of credit under the working capital facility. Additional liquidity
is available through the $40 million working capital facility,
which will be used to meet letter of credit requirements for the existing
offtake contracts and for working capital needs. The Ba3 rating
also reflects the inclusion of an initial 100% cash sweep,
which may be lowered to a 75% sweep in the event that the Project's
leverage ratio is below 3 times. The structure also includes a
$3 million annual management fee and a provision for equity partnership
level income tax payments that will be subordinated to the projects operating
costs and debt service in the waterfall. Additionally, the
structure is ring fenced through the inclusion of an independent director,
providing additional protection against potential upstream leverage.
The assigned ratings are predicated upon the final structure and documentation
being consistent with Moody's current understanding of the transaction.
TPF II, LC, LLC is a wholly owned subsidiary of TPF II,
LP, which is Tenaska's second generation private equity fund
focused on the energy industry. TPF II, LP's sponsors
are the employee-owners of Tenaska, which is one of the largest
privately owned independent power developers in the U.S.,
having developed approximately 8,000 MW of gas-fired electric
Chee Mee Hu
Senior Vice President - Team Leader
Corporate Finance Group
Moody's Investors Service
M. Sanjeeva Senanayake
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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