EME Homer City in discussions about amending 8.137%, 8.734% bonds

By Angela McDaniels

Tacoma, Wash., Feb. 29 - EME Homer City Generation LP may be facing a default and is in discussions with some holders of Homer City Funding LLC's 8.137% senior secured bonds due 2019 and 8.734% senior secured bonds due 2026 about amending the bonds, according to an 8-K filing with the Securities and Exchange Commission.

The Homer City, Pa.-based company owns three coal-fired electric generating units, which it collectively refers to as the Homer City plant. It completed a sale-leaseback of the plant to third parties in December 2001.

EME Homer City needs to make some environmental improvements to the plant by early 2014 in order to remain in compliance with Federal environment regulations. It estimates the improvements will cost $700 million to $750 million.

In the second half of 2011, EME Homer City and its indirect parent, Edison Mission Energy, conducted a bidding process to obtain capital funding to help finance the improvements. The company failed to attract the capital needed and does not expect to generate enough funds from operations to complete the retrofits.

The company said the sale-leaseback agreements in some cases significantly limit or prohibit its ability to incur debt or make capital expenditures. As a result, its ability to make the environmental improvements will be dependent on funding from the owner-lessors or third parties.

EME Homer City is discussing potential funding with the owner-lessors. The company expects that the outcome of any such discussions, if successful in providing funding for the Homer City plant, will likely result in the company's loss of substantially all beneficial economic interest in and material control of the Homer City plant.

According to the SEC filing, a failure to resolve the source of funding could result in EME Homer City's default under the lease agreement, which would give rise to remedies for the owner-lessors and secured lease obligation bondholders. These could include foreclosing on the leased assets, the general partner of Homer City, or both.

Possible amendments

General Electric Capital Corp., one of the owner participants, is prepared to provide the capital in the form of an equity contribution under certain circumstances that are part of ongoing discussions.

EME Homer said that in the initial discussions, GE Capital proposed a package of amendments, modifications and waivers in which the bonds would be exchanged for new secured notes with 92% of the current face amount of the bonds.

The new secured notes would have the same terms as the existing bonds except

• Amortization payments in October 2012, April 2013 and October 2013 would be deferred;

• Interest payments in the same periods would be paid in kind;

• Consents required for a change of control and the incurrence of up to $300 million of pari passu debt would be eliminated;

• The coverage ratio test for distributions to equity holders would be reduced to 1.15 to 1 and the block on payments to equity holders after the coverage ratios were not met three times would be removed; and

• No distributions to equity holders would be permitted during the periods that the new secured notes were paid in kind, but excess cash would be available to fund construction of the emissions control equipment.

Counter proposal

On Feb. 24, the bondholders provided an alternative transaction proposal to fund the improvements. In this proposal, the bonds would be exchanged for new unsecured notes as part of a restructuring transaction.

The new unsecured notes would have the same terms as the existing bonds except

• Interest payments from the closing until April 1, 2014 would be paid in kind with the issuer having the option for the accrual of pay-in-kind interest to begin on Oct. 2, 2013;

• Amortization payments would be suspended during the period the new unsecured notes are paid in kind with the issuer having the option to make such payments subsequent to that period;

• The new unsecured notes would not have the benefit of any security;

• The covenants prohibiting merger, consolidation or sale of assets, the incurrence of new secured or unsecured debt, the creation or incurrence of liens and the equity distributions other than upon compliance with financial ratios would be eliminated; and

• GE Capital would guarantee the obligations under the new unsecured notes.

In addition, the new unsecured notes would not be subject to redemption prior to April 1, 2014 and after that could be redeemed at 105%, 102.5% and 100% of par on April 1 of 2014, 2015 and 2016 and thereafter, respectively.

In connection with the exchange, the bondholders would consent to the elimination of the bonds' covenants and events of default.

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