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PLEASE READ AND SCROLL DOWN!

 

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Related Issuers
Rating Action:

Moody's downgrades TPF II to B2 from Ba3, outlook negative

10 Mar 2011

Approximately $140 million of securities affected

New York, March 10, 2011 -- Moody's Investors Service has downgraded TPF II LC, LLC's (TPF II) senior secured credit facilities to B2 from Ba3 and changed the outlook to negative from stable. The credit facilities that are affected are an original $165 million term loan due 2014 (approx. $100 million currently outstanding) and a $40 million working capital facility also due 2014.

RATINGS RATIONALE

The downgrade reflects TPF II's exposure to merchant power prices after May 2011, when an existing tolling agreement expires, as well as lower than expected PJM RPM capacity prices. It is not expected that TPF II will extend or replace a tolling agreement that one of its generating facilities (Lincoln) has with Exelon Generation Company (A3; stable) when it matures in May 2011. After the expiration of the tolling agreement, Lincoln, like the Crete generating facility, will sell into the ComEd sub-region of PJM as a merchant generator. As a result, the TPF II portfolio of peaking facilities will be fully exposed to merchant energy revenues and RPM capacity revenues in an operating environment of low capacity and electricity prices.

Both of these peaking facilities 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 too is lower than expectations when the deal was first rated by Moody's. These low capacity prices make TPF II dependent upon merchant energy margins to cover fixed costs and to cover scheduled debt service, especially in the delivery year beginning in June 2012, when known capacity prices are at their lowest. In addition, the facilities are running less frequently than expected, reducing the amount of variable margin available to cover fixed expenses. Based upon Moody's analysis, given currently low prices in the merchant energy markets, low capacity factors and low known capacity prices, TPF II may not be able to generate enough cash flow to cover required debt service in 2013.

Moody's notes that the project has been performing well to date from an operational standpoint. In addition, TPF II has historically produced improving credit metrics, and debt has been reducing in line with original expectations. Moody's expects that through 2011 and 2012, even under a scenario where there is little or no merchant energy margin (together with low capacity prices), TPF II should still be able to comfortably cover its fixed costs, meet required debt service and even continue to contribute to further debt reduction via the sweep (which dropped to 75% of excess cash flow once the project reached the 3.0x threshold for leverage (Debt/CFADS) in September 2010, although the project has continued to sweep 100%).

However, past financial performance in this case is not a prologue for future financial performance, especially in an environment of low merchant power prices. Starting in 2013, when known RPM capacity prices fall to $16.46/MW-day for the 2012/2013 delivery year, and assuming markets for TPF II's power remain weak, margin compression is expected to be accelerated to the point where the project may have difficulty covering its fixed operating expenses and meeting required debt service in 2013.

Moody's is therefore taking prospective rating action at this time in anticipation of this possibility. There is time for factors to change that could prevent a potential default in 2013. Merchant power prices could rebound in the meantime, offsetting the capacity price decline, or the project could enter into a new tolling agreement that could provide support to the cash flows. Furthermore, there is time for Tenaska Power Fund II, the project's sponsor, to work out a solution, including strategic options, especially if capacity prices increase after the next RPM auction scheduled for May 2011, for delivery year 2014/2015. In addition, Moody's notes that the project does have liquidity in the form of a 6-month debt service reserve supported by a letter of credit as well as a $40 million revolver with approximately $30 million available that does not expire until 2014. These pockets of liquidity give the project flexibility during a period of low power prices and margin compression. Moody's also believes that the longer term recovery prospects for the holders of the debt should be good. Therefore, Moody's is not lowering the rating below B2 at this time.

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 even if TPF II makes it through 2013, it still faces 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 default can be averted and refinancing risk reduced. The rating could be revised downward if it becomes clear that the potential for payment default comes earlier than 2013, or there are operational problems at either Lincoln or Crete.

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

The last rating action on TPF II occurred on September 17, 2007, when Moody's assigned the TPF II rating of Ba3.

TPF II LC, LLC is a 984 MW portfolio consisting of two peaking facilities, Lincoln and Crete, each located outside of Chicago, Illinois. The Lincoln facility is a nominally rated 656 MW simple-cycle, natural gas-fired plant located in Manhattan, Illinois, about 48 miles south of Chicago. The Crete facility is a nominally rated 328 MW simple-cycle, natural gas-fired plant located in Crete, Illinois, about 30 miles southwest of Chicago. Both Lincoln and Crete operate in the Commonwealth Edison Northern Illinois sub-region of the PJM Interconnection (Aa3, Issuer Rating; Stable).

TPF II is a wholly-owned subsidiary of TPF II, LP, a second generation, private equity fund focused primarily on the energy sector. TPF II, LP's sponsors are the employee-owners of Tenaska Energy, which is one of the largest privately-owned, independent power developers in the U.S., having developed over 8,000 MW of gas-fired electric generating 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 II to B2 from Ba3, outlook negative
No Related Data.
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