NRG Northeast
On February 22, co-lead managers Chase Securities and Salomon Smith
Barney closed the books on a $750 million senior secured bond
offering for NRG Northeast Generating LLC and celebrated. Why were
they elated? Bankers close to the deal say the issue was
oversubscribed two to three times for long tranches maturing in a
?merchant? period and seven-fold on a revenue contracted shorter
maturity.
The capital markets offering retired a $646 million one-year bank term loan (and working capital of $40 million) arranged by Citibank and Chase last June and provided NRG with equity to finance its acquisition of 6,495MW in operating electric generating assets in the northeast US during the past year. The financing of the bundled portfolio, largely contributed to Minneapolis-based NRG Energy tripling its the size in 12-months, now ranking among the largest three utilities in the region along with US Generating and AES. NRG Northeast is a subsidiary of NRG Energy, itself a subsidiary of Northern States Power Company, based in Minneapolis as well.
Market observers say the transaction may stand out for its sheer number of notable characteristics.
A key aspect of the bonds' appeal was the diversity of the NRG portfolio which bundled together has 50 generating units at 14 sites in western New York, New York City, Connecticut, and Massachusetts. The plants are base load, intermediate, and peaking power facilities burning coal, oil and gas.
?This was first truly diversified genco or generation company to use the capital markets,? comments Brian Bird, treasurer, NRG Energy in Minneapolis.
?It can make sense to do this on a more corporate basis, you have a little bit more flexible finance package, and the market sees a more diverse set of cash flows which can help in terms of pricing, and so in the Northeast we have a system where these plants can cover for one another from an operation stand point and because of their diverse nature in terms of base load, fuel, the pools they serve, we decided to structure it more as a corporate deal,? adds Bird, who explained that the bonds are secured by revenues produced by the power marketing contracts and some additional security but without a mortgage arrangement typical of a project financing.
The diversity of NRG Northeast also means the company's power plants I can access power pools in New England, New York, and New York City, they will also have the ability to transmit into ECAR and PJM power pools, as well as Canadian power pools in Ontario and Quebec.
Although some industry sources note that access to power pools is not an automatically positive feature given emissions and transmission restraints and costs, at Salomon Smith Barney in New York, director of global structured finance, Barry Gold shared Bird's belief that the diversity of the NRG Northeast portfolio was beneficial for the capital markets offering.
?Unlike the US Gen New England with 15 assets but only one pool, NRG Northeast has access in three pools but the ability to access seven and because of that, this transaction had the tightest spreads of any of the deregulated power companies that have been done since before the US Gen New England deal which was first, rated two notches higher, and financed in a much more bullish market,? comments Gold referring to US Generating's acquisition of 15 assets operating in the New England power pool, in November, 1998. In that deal, which was led by Chase and Lehman Brothers, a $221 million tranche of bonds maturing in 16 Ìyears were priced at 262.5 basis points over US Treasuries and a $195 million tranche of bonds maturing in 21 years were priced at 285 basis points over Treasuries.
Pricing on NRG Northeast bonds which were rated BBB- by Standard & Poor's and Baa3 by Moody's Investors Service was 145bp over Treasuries a $320 million tranche of bonds maturing 2004; 220bp over Treasuries for a $109 million due 2015; and 265bp over Treasuries for a $320 million tranche due 2024.
In response to NRG Northeast's seven time-oversubscription on the short tranche, Bird asserted that while portfolio diversity helped, investors were keenly attracted to 8% coupons on a secured bonds with a two and half year average life that is heavily contracted.
Gold compared risk mitigation in NRG Northeast offering to having a diverse stock portfolio.
?You hope that a price decline on a stock will be counterbalanced by action on another name...risks related to power costs in a deregulated market are mitigated when, for example, PJM has lower prices for bid power than the bid price for power in New York City, a utility in both power pools can take advantage of the best price for power,? comments Gold, adding, ?You have assets in NRG Northeast that are very competitive, some of those assets are used for peaking which makes it really easy to get really high prices during key hours of the year, and finally you have a company that knows how to extract value from the optionality that's created by peaks and unexpected increases in load.?
Andy Jacobyansky,# vice president and analyst in the power group at Moody's Investor's Service in New York asserts that NRG Northeast's heavy reliance on capacity revenue versus energy revenue as a feature of the portfolio that merited scrutiny.
Capacity revenues are revenues derived from the capability to generate a specific amount of electricity on demand whereas energy revenue comes from payment for electrons pushed through power lines in the form of dollars per kilowatt or megawatt hour sold.
Jacobyansky #says among the key reasons NRG Northeast is notable is that for the first four years the revenues are contracted, but are market driven during the last 25 years and that approximately 44% of revenues will come from the sale of capacity as opposed to energy. He noted that NRG Northeast's high amount capacity revenue prompted the rating agency to scrutinize the credit to a greater degree than they would a base load coal plant in constant operation.
?We believe the prices could drop a third lower than what was shown in offering statement projections ? about a 40% total drop ? that's a larger drop to get to investment grade, so we took into account that the amount of debt was such that you could drop a bit further than you could for a base load coal plant and still get out as an investor,? comments Jacobyanksy.
According to Jacobyansky, Moody's explained their rationale when investors repeatedly expressed their concerns on capacity revenue exposure.
Apparently, investors' fears were allayed by the time orders were taken.
The capital markets offering retired a $646 million one-year bank term loan (and working capital of $40 million) arranged by Citibank and Chase last June and provided NRG with equity to finance its acquisition of 6,495MW in operating electric generating assets in the northeast US during the past year. The financing of the bundled portfolio, largely contributed to Minneapolis-based NRG Energy tripling its the size in 12-months, now ranking among the largest three utilities in the region along with US Generating and AES. NRG Northeast is a subsidiary of NRG Energy, itself a subsidiary of Northern States Power Company, based in Minneapolis as well.
Market observers say the transaction may stand out for its sheer number of notable characteristics.
A key aspect of the bonds' appeal was the diversity of the NRG portfolio which bundled together has 50 generating units at 14 sites in western New York, New York City, Connecticut, and Massachusetts. The plants are base load, intermediate, and peaking power facilities burning coal, oil and gas.
?This was first truly diversified genco or generation company to use the capital markets,? comments Brian Bird, treasurer, NRG Energy in Minneapolis.
?It can make sense to do this on a more corporate basis, you have a little bit more flexible finance package, and the market sees a more diverse set of cash flows which can help in terms of pricing, and so in the Northeast we have a system where these plants can cover for one another from an operation stand point and because of their diverse nature in terms of base load, fuel, the pools they serve, we decided to structure it more as a corporate deal,? adds Bird, who explained that the bonds are secured by revenues produced by the power marketing contracts and some additional security but without a mortgage arrangement typical of a project financing.
The diversity of NRG Northeast also means the company's power plants I can access power pools in New England, New York, and New York City, they will also have the ability to transmit into ECAR and PJM power pools, as well as Canadian power pools in Ontario and Quebec.
Although some industry sources note that access to power pools is not an automatically positive feature given emissions and transmission restraints and costs, at Salomon Smith Barney in New York, director of global structured finance, Barry Gold shared Bird's belief that the diversity of the NRG Northeast portfolio was beneficial for the capital markets offering.
?Unlike the US Gen New England with 15 assets but only one pool, NRG Northeast has access in three pools but the ability to access seven and because of that, this transaction had the tightest spreads of any of the deregulated power companies that have been done since before the US Gen New England deal which was first, rated two notches higher, and financed in a much more bullish market,? comments Gold referring to US Generating's acquisition of 15 assets operating in the New England power pool, in November, 1998. In that deal, which was led by Chase and Lehman Brothers, a $221 million tranche of bonds maturing in 16 Ìyears were priced at 262.5 basis points over US Treasuries and a $195 million tranche of bonds maturing in 21 years were priced at 285 basis points over Treasuries.
Pricing on NRG Northeast bonds which were rated BBB- by Standard & Poor's and Baa3 by Moody's Investors Service was 145bp over Treasuries a $320 million tranche of bonds maturing 2004; 220bp over Treasuries for a $109 million due 2015; and 265bp over Treasuries for a $320 million tranche due 2024.
In response to NRG Northeast's seven time-oversubscription on the short tranche, Bird asserted that while portfolio diversity helped, investors were keenly attracted to 8% coupons on a secured bonds with a two and half year average life that is heavily contracted.
Gold compared risk mitigation in NRG Northeast offering to having a diverse stock portfolio.
?You hope that a price decline on a stock will be counterbalanced by action on another name...risks related to power costs in a deregulated market are mitigated when, for example, PJM has lower prices for bid power than the bid price for power in New York City, a utility in both power pools can take advantage of the best price for power,? comments Gold, adding, ?You have assets in NRG Northeast that are very competitive, some of those assets are used for peaking which makes it really easy to get really high prices during key hours of the year, and finally you have a company that knows how to extract value from the optionality that's created by peaks and unexpected increases in load.?
Andy Jacobyansky,# vice president and analyst in the power group at Moody's Investor's Service in New York asserts that NRG Northeast's heavy reliance on capacity revenue versus energy revenue as a feature of the portfolio that merited scrutiny.
Capacity revenues are revenues derived from the capability to generate a specific amount of electricity on demand whereas energy revenue comes from payment for electrons pushed through power lines in the form of dollars per kilowatt or megawatt hour sold.
Jacobyansky #says among the key reasons NRG Northeast is notable is that for the first four years the revenues are contracted, but are market driven during the last 25 years and that approximately 44% of revenues will come from the sale of capacity as opposed to energy. He noted that NRG Northeast's high amount capacity revenue prompted the rating agency to scrutinize the credit to a greater degree than they would a base load coal plant in constant operation.
?We believe the prices could drop a third lower than what was shown in offering statement projections ? about a 40% total drop ? that's a larger drop to get to investment grade, so we took into account that the amount of debt was such that you could drop a bit further than you could for a base load coal plant and still get out as an investor,? comments Jacobyanksy.
According to Jacobyansky, Moody's explained their rationale when investors repeatedly expressed their concerns on capacity revenue exposure.
Apparently, investors' fears were allayed by the time orders were taken.
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