TEXT-Fitch revises Kincaid Generation outlook to negative

Fri Feb 15, 2013 2:58pm EST

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Feb 15 - Fitch Ratings has affirmed the 'BBB-' rating on Kincaid Generation
LLC's (Kincaid) $265 million ($145.3 million outstanding) senior secured bonds
due 2020. The Rating Outlook is revised to Negative from Stable.

The Negative Outlook reflects the continued weakness in market prices that may
lead to a materially lower liquidity position.

KEY RATING DRIVERS:

--Competitive Merchant Position: Kincaid will be fully exposed to capacity,
energy, and coal market prices beginning in March 2013. Fitch recognizes that
near-term energy prices are weak and may result in lower dispatch. However,
Dominion Resources, the project sponsor, has entered into hedging agreements to
help mitigate merchant price risk. Fitch believes the project's stable operating
profile and competitive cost structure, as well as announced PJM plant closures,
enhance the project's long-term merchant position. Further, the rating is
reliant on the $145 million, as of December 2012, in project liquidity.

--Stable Operating Profile: The project has historically exhibited strong
availability factors and consistently lower than forecasted operating costs.
However, management has budgeted for higher than historical non-fuel O&M costs
mainly due to a scheduled overhaul in 2013 and environmental control costs.
Kincaid has historically maintained plant availability in the low-90% range in
non-overhaul years.

--Uncertain Environmental Regulations: The magnitude and timing of new emissions
regulations are uncertain, particularly after the courts vacated the Cross-State
Air Pollution Rule governing sulphur dioxide and nitrogen oxide in 2012. Fitch
recognizes that Kincaid is currently compliant with existing NOx and SO2
emissions regulations and views the project's installation of emission control
equipment positively, which will help to mitigate potential future compliance
costs.

--Strong Structural Features: Kincaid's structural features are generally
stronger than similarly rated thermal power projects. Notably, the backward- and
forward-looking equity distribution test of 1.75x ensures that liquidity remains
at the project.

--Liquidity Mitigates Weak Near-Term Coverage: The $145 million in project
liquidity is the primary mitigant to cash flow shortfalls and supports the
current rating. The Fitch rating case forecasts debt service coverage ratios
(DSCRs) below breakeven levels through 2016 with DSCRs reaching 1.3x or greater
thereafter. Despite the project's near-term financial weakness, its liquidity
position is generally adequate to meet fixed costs and scheduled debt service in
the Fitch rating case. Fitch's alternative stress cases forecast minimum
liquidity balances of greater than $45 million and average DSCRs of about 2x
beginning in 2017.

RATING SENSITIVITIES:
--Weak Market Prices: Sustained weakness in the capacity and energy markets that
results in a continued need to draw on liquidity.

--Operational Challenges: A major or serial forced outages leading to higher
capital costs and a lower dispatch profile than forecast.

--Increased Environmental Costs: More stringent or incremental environmental
regulation could lead to additional operating and capital costs for pollution
control equipment and emission allowance costs.

SECURITY:
The senior secured bonds are secured with a first priority lien on substantially
all of Kincaid's tangible and intangible assets, rights and interests in the
financing and project documents, insurance policies and proceeds thereof,
assignable permits and governmental approvals and any after-acquired property.

CREDIT UPDATE:
The Negative Outlook reflects the continued weakness in market prices that may
lead to a materially lower liquidity position. Fitch believes that the project's
liquidity position is adequate to prevent a default given the prospects for
recovery. Further, the 1.75x backward- and forward-looking distribution test
ensures that any available liquidity remains at the project. However,
persistently low market prices, material operational challenges, and inadequate
liquidity could trigger a rating action.

An unexpectedly low, sustained natural gas price and energy demand environment
has contributed to a lower forecasted energy price over the next three to five
years. Additionally, PJM capacity prices have fallen to historical lows due to
forecasted lower peak demand and gas capacity bidding in to the capacity market
below the minimum offer price. Fitch forecasts base case DSCRs to be below
breakeven levels over the next two years with a gradual improvement in the DSCR
profile to nearly 3x or greater beginning in 2017. The recovery in DSCRs is due
to Fitch's expectation that uneconomic coal capacity will be taken offline by
2016 and energy demand improves. Fitch considers liquidity to be robust in the
base case, which is forecast to reach a low of approximately $75 million in
2014, equal to nearly three years of debt service over the remaining 5.5 year
debt term.

The Fitch rating case, which considers a low energy price environment with a
long-term real gas price of about $3.50 per mmBtu and operational and costs
stresses, generally forecasts the DSCR profile to remain below breakeven levels
through 2016. Fitch believes that liquidity will be adequate if dispatch is
properly managed. Coverage is forecast be approximately 1.3x or greater
thereafter.

Kincaid Generation LLC consists of a 1,108 megawatt, coal-fired electric
generation facility located in Kincaid, Illinois, 17-miles southeast of
Springfield, Illinois. The plant was acquired by Dominion Energy Inc. in
February 1998 from ComEd. Kincaid will sell 100% of its capacity and energy
generation into the PJM merchant power market. Fitch notes that Dominion
announced, in the third quarter of 2012, that it is actively marketing the
Kincaid project. Currently, Fitch does not view the potential sale as a rating
driver, but will review the credit impact as terms become available.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' July 11, 2012;
--'Rating Criteria for Thermal Projects' June 18, 2012.

Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Thermal Power Projects
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