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Rating Action:

Moody's downgrades TPF Generation to B1 from Ba3, outlook negative.

10 Mar 2011

Approximately $1.16 billion of securities affected

New York, March 10, 2011 -- Moody's Investors Service has downgraded TPF Generation Holdings, LLC's (TPF Generation) first lien senior secured credit facilities to B1 from Ba3 and changed the outlook to negative from stable. At the same time, Moody's has affirmed the B3 rating on the second lien credit facility and also changed its outlook to negative from stable. The first lien credit facilities that are affected are an original $850 million term loan due 2013 (approx. $365 million currently outstanding), a $250 million synthetic letter of credit facility also due 2013, and a $50 million synthetic working capital revolving credit facility due 2011. The second lien credit facility consists of a $495.0 million term loan due 2014 (all of the $495 million is currently outstanding).

RATINGS RATIONALE

The rating action reflects TPF Generation's increasing exposure to merchant power prices after December 2011, and full merchant power price exposure after December 2012, when two heat rate call options expire respectively at the two combined cycle plants in the portfolio. There currently are no new agreements in place to extend or replace these agreements. In addition, the rating action reflects concerns about exposure to low PJM RPM capacity prices starting with the 2012/2013 delivery year. While the low merchant power and capacity prices are not expected to result in a possible payment default, these factors could result in a potential financial covenant violation on the part of TPF Generation and contribute to greater refinancing risk than expected when Moody's first rated this debt.

Two of the largest assets in the TPF Generation portfolio, High Desert and Rio Nogales, benefit from power offtake agreements. The High Desert facility, the largest combined-cycle asset in the portfolio, had a power purchase agreement (PPA) with the California Department of Water Resources (CDWR: Aa3) that expired in January 2011, but it now benefits from an energy call option agreement with J. Aron & Company from February 2011 to December 2012, that immediately follows the expiration of the CDWR agreement. Rio Nogales also has a heat rate call option agreement with J. Aron, which runs from October 2008 through December 2011. As there are currently no new agreements in place to extend or replace these agreements, these two plants will become exposed to merchant power prices starting after December 2011 and December 2012.

The TPF Generation portfolio also consists of three peaking units that bid their capacity into PJM's RPM market, for which the facilities earn capacity revenues. The RPM capacity revenues, which are known through May 2014, provide a degree of cash flow predictability at least through that date. However, recent RPM clearing prices have been lower than had been expected beginning in June 2012, when the capacity price is just $16.46/MW-day. The capacity price for the delivery year beginning in June 2013 is higher at $27.73/MW-day, but this is still below what forecasters had expected for the PJM capacity market when Moody's first rated the debt. As a result, the TPF Generation portfolio of assets will over time become increasingly exposed to merchant energy revenues and RPM capacity revenues in an operating environment of low capacity and electricity prices. Based upon Moody's analysis, given currently low prices in the merchant energy markets and low known capacity prices, TPF Generation is not expected to suffer a potential payment default, but it could under certain downside scenarios violate one of its financial covenants (the leverage ratio covenant in 2012 or 2013), and it will have higher than expected refinancing risk in 2013, when the first lien debt becomes due.

Moody's notes that the five facilities making up the TPF Generation portfolio have been performing well to date from an operational standpoint. In addition, TPF Generation has historically produced improving credit metrics, and the first lien term loan has been reducing as a result of the 100% excess cash flow sweep. The second lien term loan, which matures a year later in 2014, has not been reduced because the sweep will not apply until the first lien is fully repaid. The second lien has been current on its interest. In addition, Moody's notes that TPF Generation does have liquidity in the form of a cash-funded 6-month debt service reserve. This gives the project flexibility during a period of low power prices and margin compression. Therefore, Moody's is not lowering the rating below B1 on the first lien at this time.

There is time for the ratings drivers to change. Merchant power prices and capacity prices could rebound or the facilities could enter into new agreements with investment grade counterparties that could provide stability to the cash flows. Furthermore, there is time for Tenaska Power Fund, the project's sponsor, to work out solutions, including strategic options, especially if capacity prices improve after the next RPM auction scheduled for May 2011 for delivery year 2013/2014.

The generation portfolio consists of five natural gas-fired generation facilities, of which two are combined cycle facilities and three are simple cycle peaking facilities. Moody's believes there is real value in TPF Generation, especially in the two combined cycle units, and that the longer term recovery prospects for the holders of the debt, including the second lien debt, should be good. Therefore, Moody's is not lowering the first lien debt below B1 at this time and is narrowing the notching between the two classes of debt to two notches from three and is keeping the rating on the second lien at B3, reflecting the value of the portfolio.

The negative outlook reflects Moody's expectation that power prices and merchant energy prices will remain low. The longer term outlook for the project is highly dependent upon a significant strengthening of power markets. Moody's also notes that TPF Generation faces increased refinancing risk in 2014 at a time when it is reliant upon merchant cash flows.

The rating is not likely to be revised upward in the near term. The outlook can be revised to stable if there is significant improvement in power prices and capacity prices such that a potential covenant violation could be averted and the refinancing risk reduced. The rating could be revised downward if it becomes clear that the financial situation worsens more than expected or if there are operational problems at either of the two important combined cycle facilities.

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

The last rating action on TPF Generation occurred on December 16, 2008, when Moody's affirmed the ratings of Ba3 and B3 for the first and second lien facilities, respectively.

TPF Generation Holdings, LLC (TPF Generation) is an indirect subsidiary of Tenaska Power Fund, L.P. (Tenaska), and is a special purpose entity formed to acquire and operate several generation facilities across the continental United States. The portfolio was acquired from Constellation Energy, and the facilities are located in five states, with a total production capability of 2,480 MW. Electricity from the plants is sold into three regional transmission grids; CAISO, ERCOT and the PJM Interconnection. The generation portfolio currently consists of five natural gas-fired generation facilities, of which two are combined-cycle facilities and three are simple-cycle peaking facilities.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Richard E. Donner
VP - Senior Credit Officer
Project Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Chee Mee Hu
MD - Project Finance
Project Finance Group
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 downgrades TPF Generation to B1 from Ba3, outlook negative.
No Related Data.
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