MOODY'S PLACES THE SECURITES OF CALENERGY ON REVIEW FOR POSSIBLE UPGRADE; ALSO PLACE THE SECURITIES OF MIDAMERICAN ENERGY COMPANY ON REVIEW FOR POSSIBLE DOWNGRADE
New York, 08-12-98 -- Moody's Investors Service placed the long-term credit ratings of CalEnergy Company, Inc. (CE) under review for possible upgrade and the credit ratings of MidAmerican Energy Company (MEC) under review for possible downgrade. The rating reviews are in response to an announcement by CE and MEC that their respective boards of directors approved a definitive agreement to merge.
Ratings under review for possible upgrade are CalEnergy's senior notes, senior discount notes, senior secured limited recourse notes, rated Ba1; the convertible preferred stock of CalEnergy Capital Trust , CalEnergy Capital Trust II and CalEnergy Capital Trust III, rated "ba2"along with the underlying convertible subordinated debentures, rated Ba2; and the junior subordinated debentures and the convertible junior subordinated debentures, rated Ba3. Not included as part of the review are the ratings for CE Casecnan Water and Energy Company, Inc. (guaranteed senior secured debt, Ba2), CE Indonesia Funding Corporation (senior secured bank loan rating, Caa1), Coso Funding Corporation (senior secured notes, Baa2), Salton Sea Funding Corporation (guaranteed senior secured bonds, Baa2),Northern Electric plc (senior unsecured debt, A3 and commercial paper, P-2), Northern Electric Finance plc (guaranteed senior unsecured debt, A3) and CE Electric UK Holdings (bank loan rating, Baa1).
Ratings under review for possible downgrade are MidAmerican Energy Company's medium term notes and issuer rating, rated A3; the cumulative preferred stock, rated "a3"; the commercial paper, rated P-1; the first mortgage bonds of Iowa-Illinois Gas and Electric Company, rated A2; the issuer rating and senior unsecured rating of Iowa-Illinois Gas and Electric Company, rated A3; the preferred stock of Iowa-Illinois Gas and Electric Company, rated "a3"; the first mortgage bonds of Midwest Power Systems Inc., rated A2; the issuer rating and senior unsecured rating of Midwest Power System, Inc, rated A3; the preferred stock of Midwest Power System, Inc., rated "a3" and preferred stock of Mid American Energy Financing I, rated "a3".
The combined enterprise with have assets of $ 11.8 billion, annual revenues of $ 5 billion and will serve 3.3 million retail customers. The proposed transaction combines a regional US utility which is a low cost provider of power with a well managed global power company which owns power generation and energy assets in the United States, Asia and Europe as well as supplies and distributes electricity and gas in the UK.
Existing holders of MECH common stock would receive $27.15 in cash for their shares of MidAmerican Holding's common stock plus CalEnergy would assume $1.4 billion in debt and preferred stock for a total transaction estimate of $ 4 billion. Moody's expects the financing of the shares to be similar in structure to CE's acquisition of Northern Electric, a UK electricity distribution company, which included enhancements and impediments that provide incentives to keep cash flows at the UK holding company. While the two transactions are unique and may result in different outcomes, the Northern Electric A3 senior unsecured debt rating was confirmed upon the completion of the review.
The merger is subject to approvals by shareholder groups at both companies, the Federal Energy Regulatory Commission (FERC), the Nuclear Regulatory Commission (NRC), the Illinois Commerce Commission (ICC) and the Iowa Utility Board (IUB). In addition a ruling from the Federal Trade Commission and the Department of Justice that the combination does not violate anti-competitive provisions of federal law as required under the Hart Scott Rodino Antitrust Improvement Act. Assuming approvals are received, which is likely in this case, the merger is expected to be completed by the first quarter of 1999. While each of the companies are physically located in the same region there is little overlap in their operations which would give rise to market power concerns.
Scope of Moody's Review
In the review, Moody's will consider the risks and benefits that may accrue to each company as a result of the proposed merger. In particular, Moody's will focus on the potential improvement in business risk of the combined entity as the addition of stable, predictable cash flows from the regulated business of MidAmerican should augment the diversity of CalEnergy's existing cash flows. The review will delve into the acquisition structure and how the additional debt will affect each company or subsidiary with public ratings. Specifically, with regards to MidAmerican, the review will focus on the extent to which cash flows, in the form of dividends, may be affected by the additional level of holding company and consolidated debt that will exist in the new organization and by the need for dividends to support the growth opportunities of the merged company, including international project development. The review will further address the regulatory environment in Iowa and the likely reaction of the regulatory bodies to the transaction. Moody's expects that the total debt will be managed to a level consistent with the Company's rating objective which we believe to be investment grade, but notes that a substantial increase in leverage without additional cash flow predictability will constrain the rating.
Management of both companies have established a specific dialog with Moody's to elaborate on their plans and will meet with us in the very near future to provide information to aid in our independent review.
CalEnergy is a global energy services company with interests in geothermal power in California as well as other independent power plants in the US, electricity and gas distribution in the the UK, private power projects on a BOT structure in the Philippines and Indonesian developments currently on hold. The company's significant portion of contractual revenues and their reliability allows it to carry higher debt levels than companies without such contracts. CalEnergy is headquartered in Omaha, Nebraska.
MidAmerican is an electric and natural gas utility serving over 1.2 million customers, mainly in Iowa and western Illinois.
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