Edison Mission Energy has refinanced its Midwest Generation portfolio through the high-yield market. The $1.7 billion deal, as well as a related $800 million holding company financing, eliminates much of the complexity that characterised the assets' finances. And it cements the ascendancy of the Term B institutional loan market, now the natural home for generation company debt.

Midwest Generation is the name given to the vehicle by which Edison Mission bought the generating assets of Commonwealth Edison, an Illinois utility. The 9,218MW portfolio consists of baseload coal, intermediate oil and gas, and peaking gas capacity. It fetched $5 billion, and followed the $2.1 billion purchase of the 1,884MW Homer City plant, located in Pennsylvania.

But Edison has been the victim both of the collapse in wholesale power prices and the troubles of its utility affiliate Southern California Edison. The portfolio benefits in part from a legacy power purchase agreement with ComEd's successor, Exelon, but this expires in December 2004, and Exelon has already released 5,428MW from the agreement.

The portfolio consists of the Powerton, Joliet, Will County, Waukegan, Crawford and Fisk coal-fired plants, the five-unit, 2,968MW Collins oil and gas-fired plant, 427MW of onsite peakers and 422MW offsite peakers. This mix enables Edison to realise strong revenues under a variety of scenarios, provided that the portfolio is operated, and financed, in concert.

The 1999 purchase led to a $3.1 billion financing, of which $500 million was Edison Mission corporate debt, $1.8 million was non-recourse debt, and $774 million was a leveraged lease bank financing on the Collins units featuring equity from Babcock & Brown. It issued a further $1.367 billion in structured lease obligation bonds on the Powerton and Joliet plants.

The leases have a 33.5-year term, but the bank debt was due in two slugs - at the end of 2003 and 2004. Moreover, Collins in particular has been adversely hit by the continuing dominance of coal in setting Midwestern power prices, and the high cost of oil and gas. In its last 10-Q (report to the SEC), Midwest Generation said that it recorded a write down in the value of Collins from $858 million to $78 million. Collins has been infrequently dispatched, and Units 4 and 5 (as well as 1 and 2 at Will County) have been idled.

Edison, therefore, said that it had agreed to terminate the lease and would either abandon or sell the Collins station. However, the coal capacity has benefited from high oil and gas prices, and the baseload plants have produced steady earnings. Certainly, the plants are viewed as central to Edison Mission's continued viability.

Two factors are central to the genco's prospects - new source review and the accession of the Exelon service territory to the PJM (Pennsylvania-New Jersey-Maryland) power pool. New source review governs the upgrading of coal-fired plants with pollution control equipment, and has been subject to recent modifications. The Environmental Protection Agency has asked Midwest for information on its operating history, but has not initiated action. But enforcement could lead to mothballing or large capital expenditures.

The PJM issue involves the accession of the ComEd service territory to the independent system operator PJM. This simplifies what the Midwest assets have to pay to transmit electricity, but was not accompanied by the accession of AEP's Indiana and Ohio territories to PJM - ComEd is stranded from the rest of the power pool. AEP's accession has been blocked by regulators in Kentucky and elsewhere, which fear that it would lead to higher power prices. But it leaves Midwest's tariffs at the mercy of ComEd.

Nevertheless, having low-priced capacity close to Chicago is a strong basic proposition - the assets do, taken together, have a high enough value to serve as collateral for Term B lenders. In December, Mission Energy Holdings International, which owns Mission's overseas operations, raised $800 million through Citigroup, JPMorgan Chase, Credit Suisse First Boston and Lehman Brothers. This went towards a $550 million equity contribution to Edison Mission Midwest Holdings, which, together with cash from operations, paid off $781 million in debt due 11 December 2003. This debt will be repaid from Edison Mission's forthcoming sale of its overseas assets.

The same four arrangers closed the new debt offering, which took the form of a $700 million in first priority secured loans with a seven-year tenor and a $1 billion bond issue due in 2034, but callable in ten years. The notes have an 8.75% coupon, while the loan is priced at 325bp over Libor, which compares favourably with the 500bp tag attached to the December offering. The first priority piece gained a Ba3 rating from Moody's, and the subordinated piece B1.

This financing pays off the Collins lease and covers its termination payments - a total of $970 million. It also retires $693 million in debt owed by Midwest Holdings and guaranteed by Midwest Generation. With the issue, Edison Mission's capital structure edges towards transparency, and will be further simplified if the international assets are sold.

The Midwest assets have been the basis for several developments in power finance, including the use of unfunded commitments through a commercial paper conduit, and a rare example of a bank financed leveraged lease. The outcome of this refinancing rush, however, has a ring of familiarity to it - the way by which such players as NRG, Aquila, Reliant and Calpine have stayed standing.

Edison Mission's ultimate shape will depend on the outcome of its asset sales, for which it is understood to have received bids. The 14 projects across Europe, Asia, Australia, New Zealand and in Puerto Rico have a total capacity of 6,658MW. MidAmerican Energy and International Power are believed to be among the most eager. Several of these assets, however, are contracted, while Midwest is merchant. In the current climate, Edison's move is bold.

Midwest Generation, LLC

Status: Closed 27 April 2004

Size: $1.7 billion

Location: Illinois

Description: Refinancing of 9218MW generating portfolio

Sponsor: Edison Mission Energy

Debt: $700 million B loan (seven years, 325bp over libor), $1 billion note issue (30 years, 8.75% coupon)

Arrangers:

Citigroup, JPMorgan Chase, Credit Suisse First Boston and Lehman Brothers

Market consultant: PA

Lawyers to the borrower: Skadden Arps

Lawyers to the lenders: Milbank Tweed