MOODY'S CONCLUDES REVIEW OF ELECTRIC UTILITY LEASE OBLIGATION BONDS AND PREFERRED STOCKS
New York, 5/31/1995 -- Moody's Investors Service today concluded its review of lease obligation bonds (LOBs), secured lease obligation bonds (SLOBs) and preferred stock of certain electric utilities. The review, initiated in February, 1995, included ratings of SLOBs and LOBs issued by special purpose corporations to finance the sale and leaseback of nuclear generating facilities, and preferred stock of the utilities involved in those transactions. The review did not extend to SLOBs and LOBs supported by non-nuclear assets, nor did it include senior secured or other indebtedness of the associated utility companies. Moody's action was prompted by concerns that the value of nuclear generating facilities pledged as collateral in lease transactions had been significantly impaired by the industry's ongoing competitive transition.
Moody's concluded that increasing competition in the electricity industry, concentrated in the generation sector, has impaired nuclear asset collateral value. The effect of this impairment on SLOB and LOB holders and/or holders of utility preferred stock varies, depending on whether the leases are considered real or personal property in bankruptcy. Under a real property scenario, claims of LOB and SLOB holders in bankruptcy would generally be capped at the liquidation value of the nuclear plant pledged as collateral, plus three annual rental payments, without further recourse against the utility. Accordingly, diminished collateral value would significantly impair recovery by SLOB and LOB holders in bankruptcy.
If the nuclear assets are deemed personal property, SLOB and LOB holders whose claims were not satisfied through collateral liquidation would seek to recover the residual as unsecured creditors of the lessee. As with the real property scenario, diminished collateral value decreases the likelihood of full recovery of lease indebtedness, although such unsecured claims would not be capped. As a result of the increase in unsecured claims represented by the SLOB or LOB holders, the position of preferred shareholders may be seriously impaired in bankruptcy.
Because of current uncertainty and lack of legal precedent concerning the real vs. personal property issue, Moody's review considered possible outcomes under either scenario, and ratings were adjusted to reflect risks inherent in both. Ratings actions resulting from this review are summarized in the following table:
Issuer and Security Description Rating Action PriorRating AssignedRating
Arizona Public Service Company:APS Preferred Stock PVNGS II Funding Corporation SLOBs Confirm Confirm "baa3"Baa3 "baa3"Baa3
Centerior Energy: CTC Beaver Valley Funding Corp SLOBs Beaver Valley II Corp. SLOBs Cleveland Electric Preferred Stock Toledo Edison Preferred Stock ConfirmConfirmConfirmConfirm B1B1"b2""b2" B1B1"b2""b2"
Duquesne Light Company: DQU II Funding SLOBs Duquesne Light Preferred Stock DowngradeDowngrade Baa2"baa1" Baa3"baa3"
Louisiana Power & Light Company: LP&L SLOBs LP&L Preferred Stock ConfirmConfirm Baa3"baa3" Baa3"baa3"
Ohio Edison Company: BVPS II Funding SLOBs PNPP Funding SLOBs PNPP II Funding SLOBs Ohio Edison Preferred Stock DowngradeDowngradeDowngradeDowngrade Baa3Baa3Baa3"baa2" Ba1Ba1Ba1"baa3"
Public Service Company of New Mexico First PV Funding LOBs PS New Mexico Preferred Stock DowngradeDowngrade Ba3"b1" B1"b2"
System Energy Resources, Inc.: GG1A Funding SLOBs Confirm Baa3 Baa3
Specific rating actions are discussed below:
Arizona Public Service Company (APS):
Senior secured ratings of APS were upgraded from Baa2 to Baa1 on May 26, 1995. Reflecting increased collateral value risk, SLOB and preferred stock ratings are confirmed at existing levels.
Because existing ratings reflect appropriate levels of risk associated with all classes of securities, further adjustment was unnecessary.
Duquesne Light Company, Ohio Edison Company, and
Public Service Company of New Mexico:
SLOB and preferred stock ratings have been lowered relative to the senior secured rating to reflect increased collateral value risk.
Louisiana Power and Light Company:
The company's lease on the Grand Gulf nuclear plant is accounted for as a capital lease. Therefore, debt is carried on the balance sheet, and rated at the senior unsecured level.
System Energy Resources, Inc. (SERI):
Rating adjustment was not necessary because all debt issued by SERI is secured by a single asset, the Grand Gulf nuclear plant.
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