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News Digest

Fortnightly Magazine - July 1 1998

forecasts peak demand of 22,100 megawatts for electric this summer. That represents a 700-megawatt increase over the projected peak last summer. To ensure maximum resources are available, plant maintenance was rescheduled so that it will not occur in summer, transmission line inspection has been beefed up, and there will be more coordination with neighboring power pools for importing electricity into the region.

MERCHANT PLANTS. The difference between an investment- grade and noninvestment-grade rating for a merchant power plant ultimately derives from the project's ability to hedge its exposure to volatile commodity pricing, not from a particular set of financial indicators. That's the finding of a report from Moody's Investors Service, entitled Power Costs, Market Risk Hedging, Diversifications Key to Investment-Grade Ratings in Merchant Power.

The report explains an investment-grade rating from Moody's hasn't yet gone to "pure" merchant plants, which sell their output on the open market, but only to "hybrids," selling close to 100 percent of their output largely during the plant's financing period, under contracts with creditworthy parties.

Even for what appears to be the most competitive projects, the absence of some form of market price hedge - whether power sales contracts, tolling agreements, linkage of fuel costs to pool prices, or subordination of operating expenses to debt service - is likely to preclude the attainment of an investment-grade rating, said Moody's, or at least at any capital structure that would make economic sense for its owners.

Moody's has assigned ratings to over $1 billion of debt associated with four single-asset merchant generating facilities in the U.S., U.K. and Chile. Rated Ba2 is Calpine Pasadena, Texas. Rated Baa3 is Sutton Bridge, U.K.; Guacolda, Chile, and Kincaid, Ill. The lowest rated, Calpine Pasadena, has the most conservative leverage, and debt service coverage similar to Sutton Bridge, rated two notches higher. Sutton Bridge and Kincaid enjoy very different debt service coverage of 2.5 and 6.0 times, respectively, during their merchant period.

Public Power

LIPA/LILCO TAKEOVER. The New York Public Authority Control

Board on April 22 authorized the Long Island Power Authority to issue $7 billion in tax exempt bonds to finance the takeover of Long Island Lighting Co., including the utility's electric distribution system and transportation system and its ill-fated Shoreham nuclear plant. The first issue was set for May 13, for $3.05 billion.

It's believed that the overall $7-billion issuance is the largest ever offered. Included in the acquisition price is $4.2 billion in debt related to the Shoreham plant. LIPA will serve LILCO's former electric customers and will purchase power from the company created after Brooklyn Union Gas Co. takes over LILCO's non-nuclear generating assets.

Meanwhile, Standard & Poor's has issued a report on the sale, rating the $3.05 billion bonds "A-." According to S&P, the "A-" senior lien rating reflects limited competitive risk, stability associated with a transmission and distribution system that serves a mostly residential and affluent customer base and sound projected debt service coverage. F

News Digest is compiled by Lori A. Burkhart and Phillip S. Cross, contributing legal editors, and by Beth Lewis, editorial assistant.

Restructuring: