Moody's rates KGen loans B2, B3

Moody's Investors Service said it assigned a B2 rating to the $225 million first-priority senior secured term loan (tranche A) due 2011 of KGen LLC and assigned a B3 rating to the $250 million second-priority senior secured term loan (tranche B) due 2011. The outlook is stable.

Moody's said the ratings consider the expected commencement of a seven-year power purchase contract with Georgia Power Company (A2, senior unsecured), the funding of substantial liquidity reserves to allow the company to meet its maintenance and capital spending needs over the next several years, the requirement to fund and maintain a cash debt service reserve account, a loan structure that includes a project style cash flow waterfall mechanism, meaningful collateral value relative to the debt load and experienced operating management and O&M agreements with an affiliate of Cinergy Corp. for the remaining assets.

These strengths are offset by reliance upon recovery of the merchant wholesale power market, an asset portfolio that is subject to seasonality and weather-related cash flow volatility, geographic concentration of the asset portfolio in the SERC market, limited operating history for the asset portfolio, heavy reliance upon liquidity reserves to supplement weak expected cash flow from merchant operations and a business plan that entails a likely reliance upon the sale of peaker assets to supplement internal cash flow and liquidity reserves, according to Moody's.

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