New Jersey Economic Development Authority -- Moody's assigns initial Baa3 rating to UMM Energy Partners, LLC's $78.3 million Energy Facility Revenue Bonds issued through the New Jersey Economic...

New York, July 27, 2012 -- Moody's Investors Service has assigned a Baa3 rating with a stable outlook to the New Jersey Economic Development Authority's$78.3 million Energy Facility Revenue Bonds, (UMM Energy Partners, LLC Project), Series 2012, consisting of $52.9 million Series 2012A (Tax-Exempt - AMT) and $25.5 million Series 2012B (Federally Taxable). The bonds are obligations of UMM Energy Partners, LLC but are being issued through the New Jersey Economic Development Authority. The bonds are fixed rate, fully amortizing and callable bonds with the taxable bonds maturing in 18 years and the tax exempt bonds maturing in 30 years, yet they are both parity obligations. The bond proceeds will be used to fund the construction of the Project, cash fund bond interest payments during construction, and cash fund indenture required debt service reserve, renewal and replacement, and O&M funds.

PROJECT OVERVIEW:

UMM Energy Partners, LLC ("Owner" or "UMM") was formed by Energenic (jointly owned by a subsidiary of South Jersey Industries and DCO Energy) solely to finance, build and operate the Central Energy Center (CEC) and Energy Distribution System (EDS) ("the Project") at Montclair State University ("MSU" or "the off-taker"), pursuant to a 30-year Energy Sales Agreement (ESA) between UMM and MSU. The Central Energy Center is located on the campus and has a 5.4 MW Solar Taurus dual-fuel Combustion Turbine Generator (CTG), a Heat Recovery Steam Generator (HRSG) with supplementary firing (natural gas only), two dual-fuel back up boilers, an electric chiller and a steam-driven turbine chiller, as well as other standard components and key back up power sources including a black start diesel generator. The Energy Distribution System is a 1.6 mile loop around the campus.

The Project is expected to reach commercial operation in November 2013 and UMM has retained DCO Energy to construct the project under a turnkey, fixed price, date certain engineering and procurement (EPC) contract. Total project costs are estimated to be nearly $100 million, which includes the upfront cash funding of bond interest during construction, the required debt service and maintenance reserve funds, and bond issuance costs. Post commercial operations, DCO will also operate the Project under a 30-year Asset Management Agreement. MSU is required to take all output from the facility before using other sources.

FINANCING STRUCTURE AND LEGAL SECURITY:

The bonds are being issued through New Jersey Economic Development Authority as the project has been designated as a "Local District Heating and Cooling Facility", allowing UMM to issue tax-exempt debt, but require a second customer of steam or chilled water services be added within about three years of project completion in order to maintain the tax exemption under section 142(a)(9) of the 1986 Internal Revenue Code as amended. A second customer must be maintained over the life of the debt and can be a for profit entity.

The project was launched under the New Jersey Stimulus Act of 2009, whereby universities and colleges may contract with a private entity to assume full financial and administrative responsibility for the on-campus construction, reconstruction, repair, alteration, improvement or extension of a building, structure, or facility of the institution. The project will be financed and owned by UMM, but the university retains full ownership of the land upon which the project is completed. While not a direct debt obligation of the university, given the terms and conditions of the agreement with UMM, Moody's believes the project is essential to the university's operations and the university has been heavily involved in the project's development and will continue to play a key role moving forward given the contractual structure as they are the main off-taker.

The bonds are secured by the project revenues and available funds derived from the Energy Sales Agreement (ESA) and any future Energy Sales Agreements with future new customers, as well as a leasehold mortgage interest in the project assets and rights under the Ground Lease and Energy Sales Agreement and all other project contracts . UMM Energy Partners has assigned its interests in the project to the trustee (BNY Mellon) as collateral for the bonds, allowing the trustee to control and liquidate the project assets if needed. The project's ownership remains with UMM for the duration of the ESA . There is a cash funded six month maximum annual debt service reserve fund for the taxable bonds and a cash funded debt service reserve sized at 10% of par (the lesser of the standard 3-prong test) for the tax exempt bonds. There are also two additional cash funded reserves, a $1 million reserve and replacement account and a one-month O&M reserve. The ESA requires the capital structure to maintain at least an 80% debt to 20% equity ratio at the time of financing and over the life of the bonds. Half of the equity contribution has already been spent to fund initial project development and some initial site work with the remaining required equity contribution supported by a Letter of Credit from Wells Fargo N.A. (rated Aa3/stable outlook). The equity distribution test is 1.15 times debt service coverage.

The principal methodology used in this rating was Generic Project Finance Methodology published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

RATING RATIONALE:

The Baa3 rating is based on the essential nature and strategic value of the Project to the A1/stable rated Montclair State University, as it will supply MSU with all of its future electricity, steam, and chilled water needs and it is located on MSU's campus. The initial investment grade rating incorporates our view that the construction risk of the project is sufficiently mitigated with a fixed price, date certain, turnkey EPC with a contractor that is experienced in constructing similar projects, as confirmed with the independent engineer. The EPC contract price has some cushion to allow for cost overruns and overall liquidity during construction is adequate given the upfront funding of modest project level liquidity coupled with a 10% owner retainage on construction payments. The liquidated damages are appropriately sized for both delays and underperformance, yet they are not supported by a letter of credit as is the case with the remaining required equity contribution. The construction schedule provides adequate time and cushion for completion of the project. This is key because the contractor's failure to meet multiple specific construction milestones constitute events of default. While a workaround exists and the relationship between the partial owner of the project that is also the contractor would indicate full advance knowledge of potential delays, it is not typical of other projects we have rated. Of note, the project has already begun initial development and site work and is ahead of the EPC milestone schedule. A construction completion guaranty from South Jersey Industries (Not rated, South Jersey Gas subsidiary is rated Baa1) provides additional credit support for the regional contractor, as well as a Payment and Performance bond sized at the EPC price. The project's technology risk is viewed as relatively low as the major components have been in operation in similar configurations for many years and have been sourced from long-standing, experienced manufacturers that have provided standard warranties.

The capital structure requires an initial 20% equity investment from the owner and half of the required contribution has already contributed with the remaining half scheduled for payment at the end of the construction period and supported by a Letter of Credit from Wells Fargo N.A. The project has typical project protections regarding a cash funded debt service reserve fund sized at about 6 months of maximum annual debt service for the taxable bonds and 10% of par for the tax-exempt bonds; a $1 million cash funded Renewal and Replacement reserve to be utilized to fund future capital expenditures as the fund must be maintained at this level; and a relatively low 12 month trailing 1.15 times distribution test. The project structure does have some imperfect ring fencing provisions in that a bankruptcy of one or both of the two project owners could lead to a Change in Control that could cause an event of default if MSU does not agree to waive the event of default. However, in this case MSU would have to terminate the Energy Sales Agreement and purchase the facility at a price sized to pay the outstanding debt. Given MSU's intention to finance this plant off balance sheet, it is incentivized to support the project on a annual cash flow basis versus purchasing the system, for which it would likely have to issue debt to finance. Thus, we believe a waiver of the event of default is considered likely in most circumstances.

Another project weakness is the project's requirement to obtain a second customer for steam or chilled water within about three years of commercial operation and maintain a second customer over the life of the bonds or the tax-exempt bonds could be deemed taxable. This potential determination of taxability constitutes an event of default and subjects all outstanding parity bonds to extraordinary redemption within a short period of time. While this risk is low given the high identification of multiple potential on campus second customers, the loss of tax-exemption is possible and not typical of project financings.

There is a high predictability of future cash flows during the operating phase given a well structured off-take agreement with fixed annual payments from MSU that are adequately sized to cover debt service and fixed O&M costs, increase annually by CPI, and have a satisfactory amount of cushion to allow for fixed O&M increases. The off-take agreement has unique protection where it allows for a renegotiation of the agreement's initial base rates if future usage deviates by more than 15% above or below a future baseline level of usage that is established post commercial operation. Given the structure of the reimbursement, it is unlikely the baseline adjustment would result in a material change in expected cash flows given the sizing of the initial fixed base rates. The agreement also allows for nearly full cost recovery of fuel under an imperfect pass through arrangement that allows for annual adjustments of payments based on the initial all in gas cost of $5.97 per MMBtu. This was struck during a low gas period, so the all-in future price of gas is unlikely to materially fall below this level, which is positive for the project as low gas prices reduce the margins earned. Under most downside scenarios where gas prices, demand, and efficiency decline, coverage levels remain above 1.45 times, illustrating the resiliency of the project's cash flows.

Outlook

The stable outlook reflects our expectation that the project should achieve projected construction milestones,, absent any unforeseen extreme delays, but the EPC contract has appropriately sized liquidated damages to absorb reasonable delays.

What would change the rating UP:

The rating is unlikely to move up until commercial operations are achieved and the baseline usage period is surpassed.

What would change the rating DOWN:

Any cost overruns or delays that result in the need to pay liquidated damages could impact the rating during construction. A taxability event in the future could also impact the rating if a second customer is not added as required to retain tax-exemption.

REGULATORY DISCLOSURES

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John MedinaAsst Vice President - Analyst Project Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Chee Mee Hu MD - Project Finance Project Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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