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Rating Action:

Moody's downgrades Choctaw Generation to B2; outlook negative

22 Jun 2010

$294 million debt affected

New York, June 22, 2010 -- Moody's Investors Service has downgraded the rating on Choctaw Generation Limited Partnership's $294 million of outstanding Pass Through Trust Certificates to B2 from Ba3. The outlook remains negative. The downgrade considers the project's relative lack of financial flexibility, liquidity, and sponsor support.

Financial performance is expected to remain well below levels consistent with a Ba-category rating in 2010 notwithstanding a moderate improvement after three consecutive years of very poor performance. Rent coverage was below 1.0x in 2009 for the third year in a row. After adjusting for discretionary capital expenditures which are expected to be funded with external sources of funds, coverage is forecast to rise slightly in 2010, though it will remain narrow at just 1.05x.

While it appears that a number of the more critical operating problems facing the project that resulted in its poor performance in recent years have been rectified, the design flaw in the turbine has not been addressed, nor is it expected to be corrected for at least 12 months, if at all. As a result, the project's heat rate will remain well above the level used to determine reimbursements for fuel expenses in its power sales agreement with the Tennessee Valley Authority and no meaningful further improvement in operating or financial performance is expected unless and until the design flaw is rectified. This leaves the project with little flexibility to absorb the financial impact of any future operating problems.

The downgrade also reflects the unwillingness and/or inability of the project sponsor to inject additional capital in the project to undertake various capital expenditures that have been identified by management that might improve the project's operating and financial performance. The apparent lack of sponsor support is reportedly attributable to the fact that the transaction is structured as a leveraged lease, as a result of which there would be potentially significant tax implications for the sponsor if it were to contribute additional funds. The sponsor has indicated it has been actively working to source capital for these projects, but it is unclear whether or under what terms capital might be provided. A number of the proposed capital improvements were originally expected to be financed with the proceeds of a settlement payment from the manufacturer of the project's steam turbine generator along with the injection of $7 million in subordinated debt by the projects sponsor, but these amounts were used to finance revenue shortfalls and operating cost overruns. As a result, the project has relatively little liquidity beyond its six month debt service reserve.

The negative outlook considers that the project has failed to achieve its financial forecasts in recent years due to optimistic budgeting and ongoing operating problems. Failure to achieve expected rent coverage of 1.05x in 2010 could result in further downward pressure on the rating. The rating is unlikely to be upgraded in the near term given the negative outlook, but the outlook could be revised to stable if the project successfully achieves the projected rent coverage level.

The last rating action on Choctaw occurred on March 17, 2009 when the rating was downgraded to Ba3.

The principal methodology used in rating this issuer was Power Generation Projects, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Choctaw Generation Limited Partnership operates the 440 MW lignite-fired Red Hills Energy Facility located in Choctaw County, Mississippi. The Project sells all the power output of the facility pursuant to the terms of a long-term power purchase agreement to Tennessee Valley Authority (TVA: Aaa). CGLP is indirectly owned by Suez Energy North America, Inc., a subsidiary of GDF SUEZ SA (senior unsecured Aa3). The transaction is structured as a leveraged lease, with the pass through trust certificates secured by lease payments from the Project.

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

New York
Aaron Freedman
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Choctaw Generation to B2; outlook negative
No Related Data.
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