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.
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
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
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;
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.
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.
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 II to B2 from Ba3, outlook negative
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