MOODY'S ASSIGNS Baa2 SENIOR UNSECURED DEBT RATING TO SOUTHERN ENERGY NORTH AMERICA GENERATING, INC.'S BANK CREDIT FACILITIES
Moody's Investors Service assigns a Baa2 senior unsecured rating to $1.45 billion of bank credit facilities at Southern Energy North America Generating, Inc.
Southern Energy North America Generating, Inc. - $1.15 billion due in 364 Days with Two-Year Term-Out option.
Southern Energy North America Generating, Inc. - $250 million due in Five Years.
Southern Energy North America Generating, Inc. - $50 million due in Five Years.
Southern Energy North America Generating, Inc. (SE Generating), an indirect subsidiary of Southern Energy, Inc., which itself is a subsidiary of Southern Company, owns a 7,351 megawatt portfolio of electric generating assets located in California, New York, New England, Indiana, Texas, and Wisconsin. SE Generating purchased the assets over the past few years from Commonwealth Edison Company, Pacific Gas & Electric Company, Consolidated Edison Company, Orange & Rockland Utilities, Inc., Boston Edison Company, Commonwealth Energy System, and Eastern Utilities Associates. Generating assets in Texas and Wisconsin are in the process of being constructed.
The Baa2 rating reflects (1) the quality and diversity of SE Generating's generating assets, (2) the company's projected ability to compete successfully in the deregulated northeastern, midwestern, Texas/Louisiana, and western U.S. power markets, (3) SE Generating's conservative operating strategy, (4) the company's projected ability to cover its debt service at commodity power sales prices significantly below Moody's power sales rate projections, (5) SE Generating's relationship with Southern Company Energy Marketing L.P.(SCEM), the energy marketing and trading subsidiary of Southern Energy, (6) Southern Company's and Southern Energy's strong track record in operating plants both in the U.S. and abroad, and (7) SE Generating's strategic importance in the Southern Energy, SCEM, and Southern Company corporate strategy.
In addition, the Baa2 rating reflects Southern Energy's guarantee of $50 million of interest payments accrued on the bank credit facilities through December 31, 2002. SE Generating's capital structure consisted of 56% debt, 42% common equity, and 2% parent support. This degree of common equity indicates the importance of SE Generating's generating assets to Southern Energy's and Southern Company's business strategy. Coverages projected by the company during the three-year bank facilities are on average in excess of 3.0 times. The rating also recognizes the strength of the covenants in the bank credit documentation, which collectively encourages SENAG to maintain an investment grade rating.
The Baa2 rating also incorporates the refinancing risk associated with the bank financing. SE Generating plans to replace a large portion of this financing with permanent long-term financing sometime over the next three years. Although Moody's believes that the refinancing debt, if issued today, may carry a lower rating than Baa2, Moody's also believes that the refinancing risk is manageable.
The generating assets are in or near major load centers, which include Boston, Chicago, Dallas/Fort Worth, Indianapolis, Milwaukee, New York, and San Francisco. The generating assets expand across five North American Electric Reliability Council (NERC) regions, including Western Systems Coordinating Council (California), Northeast Power Coordinating Council (New York and New England), Mid-America Interconnected Network (Illinois and Wisconsin), East Central Area Reliability Coordinating Agreement (Indiana), and Electric Reliability Council of Texas (Texas). The California assets will contribute approximately 50% to SE Generating's total revenues, New York 26%, New England 17%, Indiana 5%, Texas 1%, and Wisconsin 1%. Total revenues will be derived from approximately 40% contract revenues and 60% market revenues, which are divided by 55% energy and 45% capacity. SE Generating's generating assets consist of 63% mid-merit capacity, 25% peaking, and 12% base-load. The fuel mix of the generating assets is diversified, consisting of 45% gas, 30% gas/oil, 12% coal, 11% oil, 1% hydro, and 1% jet fuel.
Strong Covenant Package:
The terms of the bank facilities are strong from a covenant and documentation perspective. SE Generating credit agreements contain financial maintenance covenants that restrict debt from exceeding 65% of total capitalization if it is investment grade and require the maintenance of corporate interest coverage of at least 1.75 times at the end of each fiscal quarter. In addition, the bank facilities limit additional indebtedness to a pro-forma coverage of 2.25 times provided that the company has a minimum investment grade rating. If SE Generating's coverage decreases to 2.25 times and if the company is not rated investment grade, it is restricted from declaring and making any dividend payment.
SE Generating projects coverages averaging approximately 3.9 times during the first three years. Moody's own analysis indicates that at least during the first three years of the bank credit facilities, market power rates could prove one-third lower than projected, that is an over 30% Discount to Break Even, and debt service could still be met. To the extent Moody's own financial projections differ from SE Generating's, that difference largely derives from Moody's own assumptions used for market power rate predictions. Moody's assumptions included fuel price, nuclear plant lives, reserve margin and regional new power plant return on investment. Moody's own projections assume merchant power rates approximately 10% lower than the company's projections. In its analysis, Moody's also considered the ability of SE Generating's mid-merit plant and peakers to capture more revenues than would be projected by a fundamental analysis and the special characteristics of the California, New York and New England markets.
Southern Energy North America Generating, Inc. is an indirect subsidiary of Southern Energy, Inc. Southern Energy, Inc. is a wholly-owned non-regulated subsidiary of Southern Company, which is headquartered in Atlanta, Georgia.
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