TEXT-Moody's release on Wolf Hollow

(The following statement was released by the ratings agency)

May 23 - Moody's Investors Service affirmed Wolf Hollow I LP's (Wolf Hollow) first lien senior secured rating of B1 and the second lien senior secured rating of B2. The ratings remain on review for possible downgrade.

In affirming the ratings, Moody's recognizes the strong fundamentals of the project, given its location in the ERCOT north power market which has increasingly favorable supply demand characteristics for combined cycle power generation plants. The ratings also recognize the following key credit considerations: 1) the long-term power purchase agreements (PPA) with Exelon Generation Company and the shorter term hedge with J. Aron & Company; 2) offtake contracts providing for a pass-through of fuel costs, although project's performance against the contractual heat rate thresholds fall short of full recovery of fuel costs; 3) traditional project finance structure including a cash flow waterfall funding mechanism, a 100% cash sweep mechanism that could facilitate a degree of debt reduction; 4) long-term services agreements with Mitsubishi, the original equipment manufacturer; 5) a new operations and maintenance (O&M) agreement with North American Energy Services, an experienced operator in the industry, and 6) the overall sponsor support and commitment to the project to date.

The ratings remain under review for possible downgrade in view of Moody's expectation that the project's financial performance and credit metrics relative to the financial covenants under its bank credit facilities will remain weak at least the through the first half of 2008. The residual impact of the operating problems incurred during the first half of 2007 continue to dampen the project's performance against its financial covenants, which are measured on a rolling four quarter basis. Despite its poor financial performance during 2006 and 2007, the project has been able to meet its minimum 1.20x DSCR and maximum 9.25x debt to cash flow ratio tests during the past two years given its ability to include releases from the pre-funded operating reserve and the major maintenance reserve in the calculation of cash available for debt service until the end of 2007, as permitted under its credit agreement. However, beginning in 2008, the credit agreement will not permit Wolf Hollow to include any of the reserves in order to comply with its covenant test, resulting in a greater level of susceptibility to violating its covenants if operating problems were to recur and operating cash flows are less than anticipated.

Additionally, Moody's views that based on the heat rate levels achieved by the project relative to the requirements under its offtake arrangements, the project remains exposed to low or negative levels of energy margins unless incremental merchant revenues are sufficiently large to offset the less than full pass through of its fuel costs under its offtake agreements. Wolf Hollow is also required to buy power in the spot market to satisfy obligations under its hedge with J. Aron & Company if the plant is not available when dispatched, which could continue to strain the project's cash flows and further exacerbate its ability to meet its financial covenant tests if unforeseen plant outages were to occur.

Moody's will review and monitor the project's ongoing performance as measured against budget. The project's management has taken several measures recently to not only improve the project's cost structure, but also to improve operations and reduce the likelihood of forced outages that plagued the project from optimizing its performance during 2006 and the first half of 2007.

A rating downgrade is likely if the project continues to incur further operating problems, dampening its financial performance and credit metrics or there is indication of an imminent financial covenant violation.

Wolf Hollow is a 730 MW natural gas-fired combined-cycle power generation facility located in the Electric Reliability Council of Texas (ERCOT) North control area, approximately 30 miles southwest of Fort Worth, Texas. Wolf Hollow is indirectly wholly-owned by Stark Investments. (New York Ratings Team)