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Rating Action:

Moody's rates EquiPower's senior secured debt facilities at Ba3. Outlook is stable

Global Credit Research - 04 Jan 2011

Approximately $525 million of securities affected

New York, January 04, 2011 -- Moody's Investors Service has assigned a Ba3 rating to EquiPower Resources Holdings, LLC (EquiPower or Projects) proposed $525 million in senior secured credit facilities comprising of a $425 million 7-year term loan and a $100 million 5-year senior secured working capital facility. The rating outlook is stable.

RATINGS RATIONALE

EquiPower is expected to own four gas fired power projects totaling 1,792 MW and EquiPower is owned by private equity funds managed by Energy Capital Partners and some of its co-investors. The Projects consist of the 812 MW Lake Road and 548 MW Milford projects in Connecticut and the 264 MW MassPower and 168 MW Dighton projects in Massachusetts. The Projects reached commercial operation from 1993 to 2004. Given the Projects' location in ISO-NE market, the Projects benefit from the forward capacity market (FCM). EquiPower also has in place financial hedges for approximately 61% of Lake Road's capacity, 89% of Dighton's capacity, and 46% of Milford's capacity. Power sales management and hedging are expected to be performed by EquiPower Resources Management. EquiPower will self manage its operations and maintenance for three of the four plants while EquiPower is evaluating whether to retain Alstom as O&M operator or self manage for the Milford plant. Dighton, Lake Road and Milford have existing long-term services agreements with Alstom and these agreements mature roughly between from 2011 to 2015. MassPower does not have a LTSA.

The proceeds from the $425 million of term loan will be used to fund the purchase of Milford, fund approximately $42.5 million in sponsor distribution, fund a $25 million capex reserve and pay approximately $17.5 million in fees and expenses. Approximately $17.8 million of the $100 million revolver will be used to issue a debt service reserve letter of credit and $19.3 million will be used to issue a letter of credit or other cash collateral to back various obligations including a MassPower lease obligation and an ICE account.

The Ba3 rating reflects approximately 80% of hedged gross margin over the next three years, substantial equity investment by EquiPower's sponsor leading to relatively low leverage around $237/kw, operational diversification across four plants and the competitiveness of Milford and Lake Road. The rating also considers 3-year average DSCR of 1.7x and FFO/Debt of 7% under more conservative scenarios, imperfections in the financial hedges, cash flow concentration at the Lake Road and Milford projects that have had historical operating problems, and some project finance weaknesses.

The Ba3 rating for EquiPower considers the following credit strengths and weaknesses:

Key Credit Strengths

• Approximately 80% of gross margin for the next 3-4 years are sourced from known FCM payments or financial hedges with strongly rated counterparties

• The four projects provide operational diversification across four plants and three different technologies

• The Projects benefit from capacity markets given their location in the ISO-NE market

• Milford and Lake Road have competitive heat rates and Milford has operated at or near baseload levels on a historical basis

• Substantial equity investment by EquiPower's sponsor contributes to relatively low leverage for the rating with debt to capital at 52% and debt equal to $237/kw

• Some project finance features including 6-month debt service reserve, capex reserve, security in assets, and 100% excess cash sweep.

Key Credit Weaknesses

• Exposure to volatile merchant energy and capacity prices significantly increase in 2014 and fully merchant by 2015

• The Projects' financial hedges have multiple imperfections (power and fuel basis differences, no allowance for outages, no pass through of carbon costs and no start charges)

• Forecasted cash flow generation remains concentrated with Lake Road providing roughly 50% of consolidated cash flow and Lake Road and Milford combined providing well over 90%.

• Lake Road and Milford have had a history of various operational problems and the Projects' forecast has aggressive operating assumptions compared to historical

• Dighton and MassPower's higher heat rates results in a peaker type operational profile that does not match their originally intended baseload operating profile, which could lead to operating problems

• Several project finance features are weak or lacking including ongoing major maintenance reserve, use of a collection account instead of a traditional cash flow waterfall and the ability to dividend a portion of the sale proceeds of Dighton or MassPower above specific sale price levels.

• Average cash flow metrics correspond to the 'B' category under Moody's methodology with around 6-7% FFO/Debt and 1.6-1.7 times DSCR under various conservative cases considered by Moody's compared to 12.6% FFO/Debt and 2.25 times DSCR under the base case.

EquiPower's stable outlook reflects Moody's expectation of substantial debt amortization by debt maturity, improving operations at Lake Road and Milford and financial metrics commensurate with at least 7% FFO/Debt and 1.7 times DSCR even under adverse scenarios. The stable outlook also considers the expectation that energy prices are likely to moderately improve over time while capacity prices are expected to stay the same or improve over time.

Limited prospects exist for a rating upgrade in the near term. Over the longer term, positive trends that could lead to an upgrade include greater than expected debt reduction and cash flow credit metrics solidly in the 'Ba' category under Moody's methodology.

The rating could be downgraded if the Projects incur operating problems, if the Projects achieve financial metrics below expectations or if EquiPower does not achieve forecasted debt amortization levels.

The ratings are predicated upon final documentation in accordance with Moody's current understanding of the transaction and final debt sizing consistent with initially projected credit metrics and cash flows.

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

EquiPower expects to own four gas fired power projects totaling 1,792 MW and EquiPower is owned by a private equity fund managed by Energy Capital Partners and several of the funds co-investors. The Projects consist of the 812 MW Lake Road and 548 MW Milford projects in Connecticut and the 264 MW MassPower and 168 MW Dighton projects in Massachusetts. The Projects reached commercial operation from 1993 to 2004. Energy Capital Partners manages private equity funds that invest in the power generation, midstream gas, renewable energy, and electric transmission sectors of North America's energy infrastructure.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings and public information, .

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning 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
Clifford J Kim
Vice President - Senior Analyst
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 rates EquiPower's senior secured debt facilities at Ba3. Outlook is stable
No Related Data.
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