Fitch Rates Homer City Funding's Pass-Through Bonds 'BBB-'

Business Wire, Jan 20, 2005

NEW YORK -- Fitch Ratings has assigned a rating of 'BBB-' to Homer City Funding, LLC's (HCF) senior secured pass-through bonds due 2019 and 2026. HCF is a special purpose vehicle indirectly owned by General Electric Capital Corp. (GECC), the indirect owner of the Homer City power plant. HCF bondholders rely solely on rent payments received from EME Homer City Generation LP (HCG), the lessee and operator of the plant. HCG is indirectly owned by Edison Mission Energy (EME; senior unsecured rating of 'B' by Fitch).

The rating of HCF was initiated by Fitch as a service to users of its ratings and is based on public information.

Fitch does not view HCG as bankruptcy remote from its parent and believes that HCG could be drawn into the reorganization process in the event of a bankruptcy involving EME. As property of GECC, neither the power plant nor the HCF debt would be consolidated in the bankruptcy estate. Rather, HCG could reject the lease, leaving HCF bondholders reliant on the plant's financial performance in a merchant market. Fitch believes that the current lease arrangement does not provide HCF bondholders with any economic benefit greater than would be realized by GECC selling the output on a merchant basis. Furthermore, GECC is considered capable of managing the facility in the absence of the lease and securing alternate operating and power marketing arrangements. Accordingly, the rating of HCF is not constrained by the rating of EME.

In light of HCG's financial performance, which is derived entirely from the Homer City power plant, Fitch considers it unlikely that HCG would reject the lease if drawn into a reorganization. Fitch believes an HCG restructuring would more likely result in a temporary suspension of rent payments that could weaken project liquidity before the lease is assumed or rejected. Though bondholders are protected by a six-month debt service reserve and distribution tests, HCF's ability to pay debt service could be jeopardized during an extended reorganization proceeding. As such, HCF's ratings are affected but not constrained by the credit quality of EME.

HCG's financial performance has been strong relative to other investment-grade merchant power projects. Cash flow exceeded senior rent expense by approximately 2.5 times (x) in 2002, 3.3x in 2003, and 2.6x over the past four quarters ending September 2004. Electricity prices would have to decline from 2003 levels by at least 30% before senior rent is threatened. Due to the terms of the project documents, the equity portion of rent is deeply subordinated. Thus, Fitch views HCG's senior rent service coverage as the appropriate indicator of HCF's credit quality. Note that these coverage ratios are computed using Fitch's methodology, which differs from the formulas used in the project documents and HCG's public disclosures, and excludes the cash flows associated with a lease swap agreement.

The Homer City power plant consists of three coal-fired electric generating units in western Pennsylvania with a total installed capacity of 1,884 mw. In 2001, GECC purchased the assets from EME for cash and assumed debt as part of a sale-leaseback transaction. The debt was exchanged for the pass-through bonds and assumed by HCF.