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Rating Action:

Moody's upgrades Panoche's senior secured notes to B3 from Caa1; rating is placed under review for further upgrade

16 Jun 2020

Approximately $206 million of debt securities affected

New York, June 16, 2020 -- Moody's Investors Service, ("Moody's") has upgraded Panoche Energy Center, LLC's (Panoche or the Project) senior secured notes to B3 from Caa1 and placed the project's rating under review for further upgrade. The outlook has been revised to ratings under review, from positive.

RATINGS RATIONALE

Today's rating action reflects the majority support by Pacific Gas & Electric Company's (PG&E) creditors for the utility's proposed Plan of Reorganization (POR), the approval of the POR by the California Public Utility Commission (CPUC), and the expected improvement in off-taker credit quality following the utility's emergence from bankruptcy. Throughout the PG&E bankruptcy, the utility has remained current on obligations owed to power generators including Panoche and the POR incorporates the utility assuming its power purchase agreements (PPA), including the Panoche PPA. PG&E's bankruptcy and the risk of PPA rejection in bankruptcy has been the primary risk constraining Panoche's credit quality since the project derives all of its operating cash flow from its PPA with PG&E. Panoche's credit quality also considers the project's position and intrinsic value from a capacity standpoint as a peaking unit in a high load pocket. Panoche's operational and financial performance has remained adequate, but with some forced outages experienced in Q4 2019 and in Q1 2020 which negatively impacts capacity revenues.

Project level liquidity has been impacted by the future need to repay a drawn letter of credit (L/C) obligation due in October 2022 and by the ongoing purchases of carbon allowances. The project drew $16.3 million under its debt service reserve L/C in July of 2019 since the associated credit facility expired and was not extended. The outstanding debt under the debt service reserve loan is $12.1 million as of FY 2019, as $4.2 million of the debt was repaid through the project's sale of a PG&E pre-petition claim.

The repayment of any drawn L/Cs ranks pari passu with the senior secured bonds and is due in October 2022. Additionally, Panoche's liquidity is impacted by the project's need to satisfy liabilities associated with carbon emission purchases each year with a large payment potentially due during 2021. To date, Panoche has been able to manage its liquidity to meet this ongoing obligation. Remaining liquidity includes a major maintenance reserve cash funded on a 3 year look forward basis with a balance of $1.9 million as of 12/31/2019. The project also had $4.7 million of cash on its balance sheet as of 3/31/2020. In addition Panoche maintains a $36 million L/C fulfilling its requirements under its PPA which was extended in 2019.

Panoche's review for upgrade will consider the expected emergence of PG&E from bankruptcy including the confirmation by the bankruptcy court with emergence occurring thereafter balanced against the liquidity challenges facing Panoche as it relates to the ongoing purchase of GMG emission liabilities and the repayment of the drawn LC obligation due in 2022.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Factors that could lead to an upgrade

The rating could be upgraded upon the utility's emergence from bankruptcy with an upgrade factoring in the project's ability to manage the ongoing need to acquire GHG emission credits and to address an incremental repayment obligation due in 2022.

Factors that could lead to a downgrade

Panoche's rating could be downgraded if PG&E does not emerge from bankruptcy under the terms of the current POR or the project operating performance weakens on a sustained basis causing financial metrics and project level liquidity to decline appreciably. Panoche Energy Center, LLC owns an approximate 400 MW natural gas-fired simple-cycle generating facility operating primarily as an intermediate and peaking generation plant. Panoche consists of four GE LMS100 turbine units and is located 50 miles west of the City of Fresno in Firebaugh, California. Panoche is owned by affiliates of Ares Management, L.P.

The principal methodology used in this rating was Power Generation Projects published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1106413. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jennifer Chang
Vice President - Senior Analyst
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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