North American Power Bond of the Year 2001
The current worries amongst bankers about the ability of sponsors
to refinance power projects in the capital markets may be
overstated. Provided sponsors can gather together a strong enough
portfolio of projects, tight pricing and attractive terms are
available to bond issuers. That, at least, is the lesson of the
$1.8 billion PSEG Power bond debut, launched by Morgan Stanley in
April 2001, one of the benchmarks in the generation company paper
market.
Strictly speaking, PSEG Power is not a refinancing of newbuild generation, but a restructuring ? the separation of utility-owned generating assets from the distribution business. In this respect, therefore, it is less dependent on new gas-fired capacity and a little less diverse geographically. But it is one of the clearest examples of who the real winners will be in the deregulated power markets.
This bond issue is about as far down the road to separation as PSEG is prepared to go at present. It is not hard to see why ? several unregulated spin-offs have performed badly when exposed on their own to the vagaries of stock markets, including Aquila and NRG Energy. Current thinking is that it's better to be able to maintain control of such assets and to avoid alienating loyal utility stockholders by offering up shares that later prove to drop in value.
The story of the bond issue begins with the 1999 order from the New Jersey Board of Public Utilities (BPU) that demanded that Public Service Enterprise Group, the corporate parent, divest its generating assets. Crucially, however, and unlike in California, these could be sold to a ringfenced affiliate. The bond issue can therefore be seen as a refinancing, since the sale took the form of a $1.6 billion loan and a $1.2 billion equity infusion. The bond issue largely goes towards paying this inter-company loan from the corporate level.
The separation has not been entirely tidy, however, since several of PSEG Power's natural US assets are still held by PSEG Global: these include the prized Texas Independent Energy merchant assets located in ERCOT. From now on, however, future US development comes within the PSEG Power ambit.
PSEG Power's main credit strength lies in the historical relationship between PSEG and its regulator, the BPU. This takes a dim view about the transfer of cash between regulated and unregulated affiliates (something that PG&E had a difficult time in explaining after its bankruptcy), but allows the utility to maintain a sizeable ? about 20% ? presence in its home market. PSEG Power has a one-year provider of last resort contract with the PSEG utility, which is set to expire in July 2002. But it can bid again for this contract when it comes up.
If not, then PSEG Power is reliant upon the state of the merchant wholesale market in the Pennsylvania-New Jersey-Maryland (PJM) region. According to published analyses of the transaction, the assets bear up favourably, despite the rapid growth in combined-cycle gas-fired capacity in the area. At least part of this is because PSEG Power has retained good and diverse asset portfolio, but also possibly because after overbuild concerns and plant cancellations the forward price curves for the market are a little more predictable.
Nevertheless the coverages on the 11,490MW portfolio are very robust throughout the forecast period ? at 5.7x to 7.5x. These should bear up well under all but the most catastrophic market conditions. Moreover, PSEG Power has been able to include its baseload nuclear generating fleet (60% of capacity) in the financing ? something that few other generators, with the half-exception of Entergy Nuclear, have been able to do.
There has been a fair amount of debate as to what exactly constitutes a GenCo financing, whether this is a function of size, covenants, or proportion of contracted capacity. Some participants in the issue have suggested that this is the first GenCo financing, but it is probably easier to point up where it differs from its peers. PSEG Power, for instance, has a relatively high 58 units, and few non-PSEG power purchase agreements.
The covenant structure is probably one of the loosest yet to hit the capital markets. Although it was launched as a standalone credit (in that there is no explicit support from PSEG) there is no restriction on the distributions that can be sent up to the parent. The assumption on the part of investors, however, would probably be that spare cash, where available would be spent on growing a business that PSEG has said is an important part of its future earnings strategy.
Another useful piece of flexibility is the lack of a limitation on additional indebtedness ? PSEG Power is an open-ended pool of projects, and has already taken advantage of this status. It closed in August 2001 an $822 million two-plant project financing in Indiana and Ohio. This construction facility would probably evenually be taken out at the PSEG Power level.
The bonds went out in three tranches, of five, ten and 30 years. The $500 million five-year issue had a 6.875 coupon, the $800 million ten-year bonds one of 7.75% and the $500 million in 30-year paper came in at 8.625%. The spreads at which the bonds came out compared very favourably to those of its nearest peers, including Allegheny Energy Supply, Mirant Americas and Edison Mission. All of these names carried worries about either the parent companies' strategy or their financial condition.
The deal came in 3.8x oversubscribed, with about $6 billion in orders. It also built up a sizeable European fan base, at a time when investors on the other side of the Atlantic are often criticised for an overly cautious view of merchant risk. The bonds have a non-amortizing structure, and were rated at Baa1 and BBB by Moody's Investors Service and Standard & Poor's, at the top end of the generating paper range.
PSEG Power LLC
Status: closed 9 May 2001
Size: $3 billion
Location: USA
Description: GenCo financing of 11,490MW of generating divested by utility parent to unregulated subsidiary
Sponsor: Public Service Enterprise Group
Debt: $1.8 billion in bonds
Underwriter: Morgan Stanley
Maturity: 5, 10 and 30 year tranches
Lawyers to the borrower: internal counsel
Lawyers to the underwriter: Brown & Wood
Independent Engineers: Stone and Webster
Independent Market Consultants: PA Consulting
Strictly speaking, PSEG Power is not a refinancing of newbuild generation, but a restructuring ? the separation of utility-owned generating assets from the distribution business. In this respect, therefore, it is less dependent on new gas-fired capacity and a little less diverse geographically. But it is one of the clearest examples of who the real winners will be in the deregulated power markets.
This bond issue is about as far down the road to separation as PSEG is prepared to go at present. It is not hard to see why ? several unregulated spin-offs have performed badly when exposed on their own to the vagaries of stock markets, including Aquila and NRG Energy. Current thinking is that it's better to be able to maintain control of such assets and to avoid alienating loyal utility stockholders by offering up shares that later prove to drop in value.
The story of the bond issue begins with the 1999 order from the New Jersey Board of Public Utilities (BPU) that demanded that Public Service Enterprise Group, the corporate parent, divest its generating assets. Crucially, however, and unlike in California, these could be sold to a ringfenced affiliate. The bond issue can therefore be seen as a refinancing, since the sale took the form of a $1.6 billion loan and a $1.2 billion equity infusion. The bond issue largely goes towards paying this inter-company loan from the corporate level.
The separation has not been entirely tidy, however, since several of PSEG Power's natural US assets are still held by PSEG Global: these include the prized Texas Independent Energy merchant assets located in ERCOT. From now on, however, future US development comes within the PSEG Power ambit.
PSEG Power's main credit strength lies in the historical relationship between PSEG and its regulator, the BPU. This takes a dim view about the transfer of cash between regulated and unregulated affiliates (something that PG&E had a difficult time in explaining after its bankruptcy), but allows the utility to maintain a sizeable ? about 20% ? presence in its home market. PSEG Power has a one-year provider of last resort contract with the PSEG utility, which is set to expire in July 2002. But it can bid again for this contract when it comes up.
If not, then PSEG Power is reliant upon the state of the merchant wholesale market in the Pennsylvania-New Jersey-Maryland (PJM) region. According to published analyses of the transaction, the assets bear up favourably, despite the rapid growth in combined-cycle gas-fired capacity in the area. At least part of this is because PSEG Power has retained good and diverse asset portfolio, but also possibly because after overbuild concerns and plant cancellations the forward price curves for the market are a little more predictable.
Nevertheless the coverages on the 11,490MW portfolio are very robust throughout the forecast period ? at 5.7x to 7.5x. These should bear up well under all but the most catastrophic market conditions. Moreover, PSEG Power has been able to include its baseload nuclear generating fleet (60% of capacity) in the financing ? something that few other generators, with the half-exception of Entergy Nuclear, have been able to do.
There has been a fair amount of debate as to what exactly constitutes a GenCo financing, whether this is a function of size, covenants, or proportion of contracted capacity. Some participants in the issue have suggested that this is the first GenCo financing, but it is probably easier to point up where it differs from its peers. PSEG Power, for instance, has a relatively high 58 units, and few non-PSEG power purchase agreements.
The covenant structure is probably one of the loosest yet to hit the capital markets. Although it was launched as a standalone credit (in that there is no explicit support from PSEG) there is no restriction on the distributions that can be sent up to the parent. The assumption on the part of investors, however, would probably be that spare cash, where available would be spent on growing a business that PSEG has said is an important part of its future earnings strategy.
Another useful piece of flexibility is the lack of a limitation on additional indebtedness ? PSEG Power is an open-ended pool of projects, and has already taken advantage of this status. It closed in August 2001 an $822 million two-plant project financing in Indiana and Ohio. This construction facility would probably evenually be taken out at the PSEG Power level.
The bonds went out in three tranches, of five, ten and 30 years. The $500 million five-year issue had a 6.875 coupon, the $800 million ten-year bonds one of 7.75% and the $500 million in 30-year paper came in at 8.625%. The spreads at which the bonds came out compared very favourably to those of its nearest peers, including Allegheny Energy Supply, Mirant Americas and Edison Mission. All of these names carried worries about either the parent companies' strategy or their financial condition.
The deal came in 3.8x oversubscribed, with about $6 billion in orders. It also built up a sizeable European fan base, at a time when investors on the other side of the Atlantic are often criticised for an overly cautious view of merchant risk. The bonds have a non-amortizing structure, and were rated at Baa1 and BBB by Moody's Investors Service and Standard & Poor's, at the top end of the generating paper range.
PSEG Power LLC
Status: closed 9 May 2001
Size: $3 billion
Location: USA
Description: GenCo financing of 11,490MW of generating divested by utility parent to unregulated subsidiary
Sponsor: Public Service Enterprise Group
Debt: $1.8 billion in bonds
Underwriter: Morgan Stanley
Maturity: 5, 10 and 30 year tranches
Lawyers to the borrower: internal counsel
Lawyers to the underwriter: Brown & Wood
Independent Engineers: Stone and Webster
Independent Market Consultants: PA Consulting
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