Fitch Places Kleen Energy Loans on Watch Negative

Two term loans used to finance the construction of Kleen Energy have been placed on Rating Watch Negative by Fitch Ratings.  According to the Wall Street Journal, this could possibly put the loans in "junk territory."

The Fitch release as it appeared in Business Wire.

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has placed the following Kleen Energy Systems, LLC (Kleen) term loans on Rating Watch Negative:
--$435 million term loan A due 2018 'BBB-';
--$295 million term loan B due 2024 'BBB-'.

The Rating Watch Negative is based on the potential for heightened completion risks following an apparent natural gas explosion at the Kleen generating facility on Feb. 7, 2010. Fitch has yet to consult with the sponsor or project management regarding the accident. The precise cause of the explosion and the full extent of the damage are unknown, and local government officials have confirmed a number of casualties and injuries. The construction of the generating facility had been proceeding within budget and on schedule, with the sponsor estimating a completion date of June 1, 2010. Fitch will resolve the Rating Watch Negative once an estimate of the repair costs and a revised construction schedule have been provided.

Fitch believes the accident may prevent Kleen from achieving the sponsor's originally projected completion date, and the length of the delay cannot be estimated at this time. The force majeure provisions of the tolling and capacity purchase agreements provide for the suspension of liquidated damages and the extension of contract termination dates, though it is uncertain whether force majeure provisions will adequately mitigate Kleen's potential exposure to construction delays. Fitch notes that the sponsor's estimated commercial operation date of June 2010 represents a six-month cushion relative to the requirements of the capacity purchase agreement, before taking into consideration schedule extensions allowable under force majeure conditions. Similarly, the tolling agreement would not take effect until April 2011, approximately 11 months after the previously estimated COD.

Fitch has yet to confirm the current level of construction contingency and cannot determine whether insurance proceeds will be sufficient to cover the cost of repairing the facility. As of September 2009, Fitch understood that the originally budgeted contingency remained largely intact. Additionally, Kleen maintains a debt service reserve account equivalent to the next six months of debt service.

Kleen is a special-purpose company created solely to develop, own and operate the project, which would consist of a 620-MW dual-fuel, combined-cycle electric generating facility located near the city of Middletown, CT. Kleen is using the proceeds of the term loans to finance construction of the project under a fixed-price, turnkey EPC contract with O&G. After the project achieves commercial operations, Kleen will sell capacity under a 15-year agreement to Connecticut Light and Power (CL&P, Fitch IDR of 'BBB' with a Stable Outlook), which will compensate Kleen with the equivalent of fixed capacity payments. The facility's energy output will be purchased by Constellation Energy Commodities Group, Inc. (CCG) under a seven-year tolling agreement. Constellation Energy Group, Inc. (Fitch IDR of 'BBB-' with a Stable Outlook), the parent company of CCG, has partially guaranteed CCG's obligations under the tolling agreement.

Energy Investors Funds indirectly owns 80% of the economic interest in Kleen through its subsidiaries United States Power Fund II LP, USPF II Institutional Fund LP, and United States Power Fund III LP. White Rock Holdings Associates LLC, a project development company owned by O&G and individual investors, holds the balance of the ownership interests.

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