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Rating Action:

Moody's rates Valley Road Funding's new credit facilities at Ba3 with a stable outlook

Global Credit Research - 10 May 2010

Approximately $330 million of securities affected

New York, May 10, 2010 -- Moody's Investors Service has assigned a Ba3 rating to Valley Road Funding LLC's (Valley Road or Projects) proposed $330 million in senior secured credit facilities comprising of a $250 million approximately 7-year term loan, a $20 million 6-year senior secured working capital facility and a $60 million 6-year letter of credit facility. The rating outlook is stable.

Valley Road Funding is an indirect subsidiary of private equity funds managed by LS Power and owns two gas fired power projects totaling 903 MW. The largest project is the 570 MW Griffith combined cycle plant that has a 570 MW tolling agreement (Tolling agreement) with Nevada Power Company (Ba3/stable issuer rating) and is located in Arizona. The Griffith plant has a separate 25 MW contract with an Arizona based electric cooperative (not rated) that Valley Road expects to meet with market purchases. The second plant is the 333 MW Rocky Road simple cycle plant that is located in Illinois and sells its capacity and energy into PJM. Established in 1990, LS Power's principal business is to develop, own, manage, and invest in power generation and related assets in the United States including natural gas, solar and transmission. LS Power Group has developed, acquired, operated or managed approximately 20,000 MW of generation assets.

The proceeds from the $250 million term loan will be used to pay down approximately $160 million of an existing $380 million term loan, fund an equity distribution of approximately $80 million and pay fees and expenses related to the transaction. The remainder of the existing $380 million term loan is expected to be repaid from a sale or refinancing of another LS Power power project and a condition precedent to funding will require all of the existing senior secured credit facilities at Valley Road be repaid or canceled. The $60 million letter of credit facility is expected to backstop the 9 month debt service reserve and various performance letters of credit. The $20 million working capital facility is expected to be unused.

The Ba3 rating reflects approximately 74% of margins contracted through term loan maturity, limited refinancing risk at maturity with 12%-37% of the original debt outstanding under various sensitivities, improved operational performance and project finance features.

The rating also reflects approximately 26% of margins tied to merchant energy and capacity prices, credit metrics commensurate with a 'B' category under conservative cases considered by Moody's, somewhat lumpy major maintenance cash flows and high estimated debt to total capital.

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

Key Credit Strengths

• Approximately 74% of the Projects' net margins are provided by known PJM RPM capacity payments through May 2013 and the Tolling agreement.

• Griffith's peak summer availability has averaged around 98% since 2007 while Rocky Road has averaged year around availability of 96.5% since 2007.

• Project finance features include a 9-month debt service reserve, upstream guarantees from operating companies, cash flow waterfall, 1st lien in underlying assets and 100% excess cash sweep.

• NAES, a well known third party operator, provides O&M services to the Projects.

• The LTSA with GE provides some stability to the Project's major maintenance costs and the Project's obligations to GE are backed by a letter of credit.

• The Projects have diversification across two projects located in two different power markets.

• Refinancing is forecasted to be limited with debt around $33/kw under the management's base case and up to $103/kw under conservative downside cases considered by Moody's.

Key Credit Weaknesses

• Contracted cash flows are primarily sourced from Nevada Power which is rated Ba3.

• Average cash flow metrics correspond to the 'B' category under Moody's methodology with around 11% FFO/Debt and 2 times DSCR under various conservative cases considered by Moody's compared to 18% FFO/Debt and 2.8 times DSCR under the base case.

• The Projects' cash flow and credit metrics are sensitive to higher operating costs, operating heat rate and realized merchant energy and capacity margins.

• Approximately 65% of the major maintenance costs are due around the time of the outage while the major maintenance reserve is only 6 months forward looking.

• The Projects are mid merit to peaking assets with Griffith and Rocky Road achieving a 35% and 1.5% capacity factor, respectively, over the last three years.

• The Project will be exposed to the volatile PJM RPM market starting in May 2013 and market based margins are forecasted to rise over time to around 37% of annual net margin by 2017.

• Valley Road can sell Rocky Road and is only required to use the proceeds to pay the Targeted Sale Amount.

• Debt to total capital is very high given the dividend payment at financial close.

Valley Road's stable outlook reflects Moody's expectation of substantial debt amortization by debt maturity, continued solid operations and financial metrics according to forecast. The stable outlook also considers the expectation that capacity and energy prices are likely to moderately 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 compared against base case expectations, an improvement in Nevada Power's credit quality and sustained cash flow credit metrics solidly in the 'Ba' category under Moody's methodology.

The rating could be downgraded if Nevada Power deteriorates in credit quality, if either projects incur operating problems or if the Projects do not meet forecasted credit metrics and debt balances.

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 rating this issuer was Power Generation Projects, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Valley Road is a wholly owned subsidiary of private equity funds managed by LS Power and owns two gas fired power projects totaling 903 MW. The largest project is the 570 MW Griffith combined cycle plant that has a 570 MW tolling agreement with Nevada Power Corporation and is located in Arizona. The Griffith plant has a separate 25 MW contract with an Arizona based electric cooperative (NR) that Valley Road expects to meet with market purchases. The second plant is the 333 MW Rocky Road simple cycle plant that is located in Illinois and sells its capacity and energy into PJM. LS Power manages private equity funds that develops, owns, manages, and invests in power generation assets in the United States including natural gas, solar and transmission.

New York
Clifford J Kim
Asst Vice President - Analyst
Project & Infrastructure Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Chee Mee Hu
Managing Director
Project & Infrastructure Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's rates Valley Road Funding's new credit facilities at Ba3 with a stable outlook
No Related Data.
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