Fitch Expects to Rate Colver Power Project 'BBB-'.

CHICAGO -- Fitch expects to assign an underlying rating of 'BBB-' to Pennsylvania Economic Development Financing Authority's (PEDFA) resource recovery revenue refunding bonds issued on behalf of the Colver Power Project. The rating applies to the expected issuance of $169 million in senior bonds due 2018 (the 2005 series F bonds). The expected issuance of $20 million in subordinated bonds due 2015 (the 2005 series G bonds), as well as the outstanding senior 1992 series B bonds due 2008, are unrated.

Holders of the series F and B bonds will benefit from a guaranty of scheduled debt service payment under an insurance policy with Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch.

The 2005 series F and G bonds are being issued by PEDFA to refinance the 1994 series D and E bonds used to fund the initial costs of developing the Colver Power Project, a 111 MW bituminous waste-coal-fired generation facility operating on circulating fluidized bed (CFB) technology located in Cambria County, PA. The bonds are secured by, among other things, revenues resulting from a long-term power sales agreement (PSA) with Pennsylvania Electric Company (Penelec). Ownership of the project is structured as a leveraged lease with Inter-Power/AhlCon Partners (Constellation Energy Group, Northern Star Generation, and Inter-Power USA, collectively, the partnership) as lessee.

The underlying rating reflects Colver's credit quality on a stand-alone basis, independent of the credit quality of the individual partners, and currently unconstrained by the credit quality of Colver's primary counterparty, Penelec. Fitch believes that Colver's status as a qualifying facility (QF) under federal legislation practically guarantees its regulatory and contractual environment for the life of the debt. Projected financial performance is unusually strong for a QF in the 'BBB-' rating category, and contractual revenues and expenses are closely linked. Fitch believes that the primary driver of cash flow is the project's availability to produce and deliver energy under the PSA.

Fitch believes that the appropriate measurement of the series F bonds' credit quality is debt service coverage ratios (DSCRs) based on the total debt service on the senior bonds; a payment default on the series G bonds or on the equity component of rent does not negatively affect the senior bonds. Debt service on the series G bonds is subordinate in the waterfall, while payment of equity rent is conditioned on a distribution test. Importantly, neither the series G bondholders nor the owner participant have the right to exercise remedies in the event of a payment default.

Primary credit strengths are the following:

-- PSA mitigating volumetric and price risks;

-- QF status minimizes external uncertainty;

-- Long-term access to low-cost fuel sources;

-- Established operating and financial performance.

Concerns include the following:

-- Occurrence of two major forced outages in recent years;

-- The upcoming spring 2006 outage.

In the sponsor base case, debt service coverage ratios (DSCRs) on the senior debt average 1.80 times (x), with a minimum of 1.56x in 2017.

Three stress scenarios were performed to assess the project's sensitivity to operational performance. A 10% increase in O&M expenses reduces DSCRs by less than 0.1x, averaging 1.72x. A 5% increase in heat rate has a negligible effect on DSCRs because of the low cost of fuel and ash disposal; DSCRs average 1.79x. Reducing availability by 15% forces coverages down to an average of 1.37x. Fitch interprets this scenario as representing an extended forced outage (approximately two months); such a severe deterioration in annual availability is highly unlikely. It is worth noting that this scenario includes no allowance for recovery under business interruption insurance.

A locational marginal price (LMP) stress was performed, eliminating all benefit to the project from LMP production, which accounts for about $2.4 million in net revenue annually. Under this scenario, the project only receives payments from Penelec, corresponding to generation up to the PSA caps. Coverages average 1.67x. The small decrease in coverages relative to the base case illustrates that the project's financial performance is driven almost entirely by energy produced under the PSA's base energy prices.

Since contractual pricing in the PSA, limestone agreements, and many other project documents are linked to inflation, Fitch analyzed the project's sensitivity to inflation. The project's primary expense is fuel, which is almost fully controlled by the partnership and is therefore essentially a fixed cost. As a result, the inflationary benefit to PSA revenues outweighs the inflationary impact on operating expenses. Decreasing inflation from an average of 3% to 1% depresses senior debt coverages to 1.72x.

Fitch has published a presale report with a detailed discussion of the transaction and rating rationale. The presale report 'Colver Power Project,' is available on the Fitch Ratings web site at www.fitchratings.com under 'Project Finance' and 'Public Finance' or by contacting the ratings desk at 800-893-4824.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies, and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.