Fitch Affirms Panther Creek Project's Bonds at 'BBB-'

The rating reflects contracted revenues extending beyond the life of the rated debt, derived entirely from energy payments earned under a power purchase agreement (PPA) with Metropolitan Edison Company (Met-Ed; Issuer Default Rating of 'BBB-' with a Stable Outlook by Fitch). The PPA provides a stable source of revenue according to an escalating, fixed-price schedule subject to required energy generation levels. PCP's credit quality is linked to Met-Ed's counterparty rating, the sole source of PCP's revenue.

The rating also reflects fuel price risk and an increasing cost profile. PCP is currently contracted for approximately two thirds of its waste coal supply requirements through 2012 and purchases the remainder of its fuel needs on the spot market. Actual fuel expenses have risen faster than revenues, resulting in a debt service coverage ratio (DSCR) of 1.38 times (x) for 2008, compared to an average DSCR of 1.8x for the prior three years. Twelve days of forced outage due to a generator malfunction in August 2009 and associated repair costs contributed to reduced cash flow in the current year. Fitch expects a DSCR of approximately 1.4x for 2009, the year of maximum scheduled debt service, and a DSCR slightly exceeding 1.4x in 2010. Moderate increases in fuel pricing or forced outages are likely to reduce cash flow but are not expected to threaten PCP's credit quality.

Project performance has generally exceeded base case expectations. The average contractual capacity factor for 2006 through 2008 exceeded 95%, compared to a base case expectation of 94%. Capacity factors are expected to remain at historical levels through the maturity of the rated debt in 2012.

The Panther Creek project consists of a nominal 86 MW waste coal fired generating plant and a 31-mile transmission line that links the plant to Met-Ed's South Hamburg substation. PCP is a general partnership jointly owned by subsidiaries of Constellation Energy Group and Northern Star Generation. PCP was formed solely to develop, own, lease and operate the Panther Creek generating facility. The facility began commercial operations in October 1992 and was then sold and leased back by Panther Creek in December 1992. The Carbon County Industrial Development Authority (PA) issued the debt on behalf of the owner-participants as part of the leveraged lease transaction.

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SOURCE: Fitch Ratings

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