Moody's downgrades Midland Cogeneration

Moody's Investors Service said it downgraded the rating of Midland Cogeneration Venture's $273 million in secured subordinated lease obligation bonds to B3 from B1.

The outlook is stable.

Moody's said the downgrade reflects the potential for substantial losses unless natural gas prices decline substantially before the project's natural gas hedging arrangements expire. These hedging arrangements help to insulate the project from high natural gas prices, but the level of hedging begins to fall off significantly over the next year.

At the end of the third quarter, Midland had roughly $211 million of cash reserves, of which about $91 million is specifically designated to cover the debt portion of the company's rent payment obligations.

The stable outlook reflects the possibility that natural gas prices could decline over the next several years and that the project's cash balances could support losses for a period of time, the agency said. The rating and outlook also consider expectations for substantial recovery if a default were to occur in the near term.

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