A long haul, but Cajun comes in
After the longest federal court bankruptcy in US history, 1,704MW
were finally acquired by NRG South Central Generating LLC ? two
coal and three gas-fired power plants in Louisiana ? from Cajun
Electric Power Cooperative through an $800 million bond offering in
late March, jointly led by Chase and Lehman Brothers.
The NRG South Central Generating bonds came to market only weeks after other major NRG capital market offerings ? a factor, some market observers say drove up cost for the NRG South Central during the bond offering.
?NRG probably paid a little over the odds given there was a lot of supply of their paper in a relatively compact period. But apparently they still had quite a bit of interest with close to 50 investors in the book and pretty solid oversubscriptions, particularly on the short piece,? comments one market observer.
The $800 million in senior secured bonds were offered in two tranches and priced as follows: A $500 million tranche with bonds due 2016 priced at 280 basis points to 10-year US Treasuries and a $300 million tranche with bonds due 2024 priced at 337.5 bp to 30-year US Treasuries and an inverted yield curve. A $40 million bank revolver for working capital was led by Bank of Tokyo ? Mitsubishi.
The bond offering will partially fund the $1.086 billion acquisition and pay fees and expenses. NRG will provide a remaining $288 million in equity.
In around one month Minneapolis-based NRG, (which has tripled in size year-to-date), raised close to $2 billion beginning February 22 with a $250 million bond issue by NRG Northeast Generating for the acquisition of 6,495 MW in the north-east US. A $250 million corporate bond offering for NRG Energy followed two weeks later.
Brian Bird, treasurer at NRG Energy in Minneapolis, defends the price the company paid for the Cajun assets. ?We believe that if these assets were offered today in an auction process they'd come at a much higher price than we ultimately paid. I would say it's something in the order of the $800 per kw range and without naming specific deals there were other coal fired assets that came out during this time in an auction process and they ranged between $600 to $900 per kw.?
Bird concedes however that NRG South Central's split rating hurt the issuance. Standard & Poor's rated the bonds BBB- while Moody's Investors Service gave the bonds a higher Baa2 rating.
The investors focused on the lower of the two ? S&P.
As part of a settlement in 1999 for Cajun's 1996 Chapter 11 bankruptcy filing, NRG South Central offered Cajun's 11 electric distribution co-operatives in Louisiana long-term power contracts at a competitive cost. Seven of the cooperatives accepted 25-year offtake agreements, while four have accepted short-term contracts that may end within two years. On average, NRG South Central projects it will receive 50% of its revenues from the 11 electric distribution co-ops. Non-member power purchase agreements will account for an additional 3.2% of the revenue stream, while the 44% of revenues will come from the sales of energy in to the wholesale electricity market, representing a notable merchant risk.
Cajun's bankruptcy stemmed from its 30% investment in the1000 MW River Bend nuclear facility. When the Louisiana Public Service Commission refused to let Cajun pass on the costs of its investment in the nuclear facility to customers the company was unable to service its $4.2 billion in rural utilities service debt.
Although it was the nuclear facility that forced Cajun into bankruptcy, the plant was not included in the acquisition won by an NRG South Central Generating and Southern Energy partnership during a competitive bidding process following Cajun's bankruptcy filing. In September 1999, NRG Energy purchased Southern Energy's 50% stake in the project.
The acquisition gives NRG South Central two 110MW gas fired power plants commissioned in 1972, collectively called Big Cajun I, and three 575 MW coal fired power plants commissioned between 1981 and 1983, called Big Cajun II. Entergy Gulf States Utilities remains owner of 42% of Big Cajun II, plant three.
In addition to the uncertainty about how deregulation and competition will develop in the south-east power market, Arleen Spangler and David Bodek, analysts at Standard & Poor's, say another key risk in the offering is that contracts with the co-ops are requirement contracts. Therefore NRG South Central is exposed to co-op demand risk as well as retail access risk. On the up side the co-ops' customer base is 90% residential.
Spangler and Bodek point out that although NRG South Central operates in a region dominated by companies with significant market concentration, including Southern Energy, Entergy, and the Tennessee Valley Authority, the company has transmission links to the Entergy system.
?The Into Entergy market hub is established on the New York Mercantile Exchange, one of the most liquid electricity trading/exchange hubs in the nation for the wholesale market,? say the analysts.
Because no liabilities remain from Cajun's bankruptcy it was not a risk factor in the NRG South Central bond offering, nevertheless sources question why the settlement took so long. ?It's the combination of three things,? submits John Veech, senior vice-president project finance, at Lehman Brothers in New York. ?The bankruptcy process in the US can be an open ended thing to start with and judges have a lot of discretion about how they run them, so having a bankruptcy go on for a couple years is not unusual. Second, you're in rural Louisiana where they tend to do things their own way and you also have a lot of bankruptcies that are governed by state law based on French civil codes as opposed to Anglo law. Finally, when you have a co-op ? which itself is composed of members that are also co-ops ? it is a more complicated situation than a corporate bankruptcy because a lot of legal precedent does not address the co-ops specifically. They all played a part in Cajun?.
The NRG South Central Generating bonds came to market only weeks after other major NRG capital market offerings ? a factor, some market observers say drove up cost for the NRG South Central during the bond offering.
?NRG probably paid a little over the odds given there was a lot of supply of their paper in a relatively compact period. But apparently they still had quite a bit of interest with close to 50 investors in the book and pretty solid oversubscriptions, particularly on the short piece,? comments one market observer.
The $800 million in senior secured bonds were offered in two tranches and priced as follows: A $500 million tranche with bonds due 2016 priced at 280 basis points to 10-year US Treasuries and a $300 million tranche with bonds due 2024 priced at 337.5 bp to 30-year US Treasuries and an inverted yield curve. A $40 million bank revolver for working capital was led by Bank of Tokyo ? Mitsubishi.
The bond offering will partially fund the $1.086 billion acquisition and pay fees and expenses. NRG will provide a remaining $288 million in equity.
In around one month Minneapolis-based NRG, (which has tripled in size year-to-date), raised close to $2 billion beginning February 22 with a $250 million bond issue by NRG Northeast Generating for the acquisition of 6,495 MW in the north-east US. A $250 million corporate bond offering for NRG Energy followed two weeks later.
Brian Bird, treasurer at NRG Energy in Minneapolis, defends the price the company paid for the Cajun assets. ?We believe that if these assets were offered today in an auction process they'd come at a much higher price than we ultimately paid. I would say it's something in the order of the $800 per kw range and without naming specific deals there were other coal fired assets that came out during this time in an auction process and they ranged between $600 to $900 per kw.?
Bird concedes however that NRG South Central's split rating hurt the issuance. Standard & Poor's rated the bonds BBB- while Moody's Investors Service gave the bonds a higher Baa2 rating.
The investors focused on the lower of the two ? S&P.
As part of a settlement in 1999 for Cajun's 1996 Chapter 11 bankruptcy filing, NRG South Central offered Cajun's 11 electric distribution co-operatives in Louisiana long-term power contracts at a competitive cost. Seven of the cooperatives accepted 25-year offtake agreements, while four have accepted short-term contracts that may end within two years. On average, NRG South Central projects it will receive 50% of its revenues from the 11 electric distribution co-ops. Non-member power purchase agreements will account for an additional 3.2% of the revenue stream, while the 44% of revenues will come from the sales of energy in to the wholesale electricity market, representing a notable merchant risk.
Cajun's bankruptcy stemmed from its 30% investment in the1000 MW River Bend nuclear facility. When the Louisiana Public Service Commission refused to let Cajun pass on the costs of its investment in the nuclear facility to customers the company was unable to service its $4.2 billion in rural utilities service debt.
Although it was the nuclear facility that forced Cajun into bankruptcy, the plant was not included in the acquisition won by an NRG South Central Generating and Southern Energy partnership during a competitive bidding process following Cajun's bankruptcy filing. In September 1999, NRG Energy purchased Southern Energy's 50% stake in the project.
The acquisition gives NRG South Central two 110MW gas fired power plants commissioned in 1972, collectively called Big Cajun I, and three 575 MW coal fired power plants commissioned between 1981 and 1983, called Big Cajun II. Entergy Gulf States Utilities remains owner of 42% of Big Cajun II, plant three.
In addition to the uncertainty about how deregulation and competition will develop in the south-east power market, Arleen Spangler and David Bodek, analysts at Standard & Poor's, say another key risk in the offering is that contracts with the co-ops are requirement contracts. Therefore NRG South Central is exposed to co-op demand risk as well as retail access risk. On the up side the co-ops' customer base is 90% residential.
Spangler and Bodek point out that although NRG South Central operates in a region dominated by companies with significant market concentration, including Southern Energy, Entergy, and the Tennessee Valley Authority, the company has transmission links to the Entergy system.
?The Into Entergy market hub is established on the New York Mercantile Exchange, one of the most liquid electricity trading/exchange hubs in the nation for the wholesale market,? say the analysts.
Because no liabilities remain from Cajun's bankruptcy it was not a risk factor in the NRG South Central bond offering, nevertheless sources question why the settlement took so long. ?It's the combination of three things,? submits John Veech, senior vice-president project finance, at Lehman Brothers in New York. ?The bankruptcy process in the US can be an open ended thing to start with and judges have a lot of discretion about how they run them, so having a bankruptcy go on for a couple years is not unusual. Second, you're in rural Louisiana where they tend to do things their own way and you also have a lot of bankruptcies that are governed by state law based on French civil codes as opposed to Anglo law. Finally, when you have a co-op ? which itself is composed of members that are also co-ops ? it is a more complicated situation than a corporate bankruptcy because a lot of legal precedent does not address the co-ops specifically. They all played a part in Cajun?.
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