Fitch Affirms Homer City Funding, LLC's 'BBB-' P-T Bonds

Business Wire, Sept 27, 2006

NEW YORK -- Fitch Ratings affirms the 'BBB-' rating on Homer City Funding, LLC's (HCF) $830 million ($797 million outstanding) senior secured pass-through bonds due 2019 and 2026. HCF is a special purpose vehicle indirectly owned by General Electric Capital Corporation (GECC), the indirect owner/lessor of the Homer City power plant. Debt service on the pass-through bonds relies solely on senior rent payments from EME Homer City Generation LP (HCG), the lessee and operator of the plant. HCG sells energy, capacity and emissions credits through Edison Mission Marketing & Trading, Inc. (EMMT). HCG and EMMT are indirectly owned by Edison Mission Energy (EME; IDR rated 'BB-' by Fitch).

Fitch does not view HCG as bankruptcy remote from its parent. However, as property of GECC, neither the power plant nor the HCF debt would be consolidated in a bankruptcy estate. Fitch believes that the current lease arrangement does not provide HCF bondholders with greater economic benefit than could be realized by GECC selling the output if HCG were to reject the lease. Accordingly, the rating of HCF reflects its stand-alone credit quality and is not constrained by the rating of EME.

HCG's financial performance has been consistent with other investment grade merchant power projects. Cash flow exceeded senior rent expense by approximately 2.7 times (x) in 2005 and 2.4x in 2004. In late January 2006, one of the three generating units at Homer City was taken out of service due to the failure of its main power transformer, and was not returned to service for over three months. To assist HCG with a cash shortfall due to the forced outage, an EME subsidiary provided cash under a subordinated revolving loan agreement and EMMT made advance payments against future deliveries of power. As a result, HCG has been able to meet all its scheduled debt service payment obligations. Fitch expects that the advanced payments from EMMT represent less than 10% of 2006 revenue, and that projected coverage ratios will remain adequate for the assigned rating as HCG delivers the prepaid power over the next year.

HCG benefits from a low marginal cost of production, but is heavily exposed to price volatility in the electricity market as a merchant generator. Going forward, realized electricity prices would have to decline from current levels by at least 25%, while keeping operating expenses fixed, before senior rent is threatened. As evidenced by the extended forced outage earlier this year, HCG is subject to operating risk but otherwise strong historical operating performance suggests the facility is adequately maintained.

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.

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