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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).
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
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
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.
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
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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.
Richard E. Donner
VP - Senior Credit Officer
Project Finance Group
Moody's Investors Service
Chee Mee Hu
MD - Project Finance
Project Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades TPF Generation to B1 from Ba3, outlook negative.
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