Conectiv, a U.S. energy provider that serves four Mid-Atlantic states, is planning to enter its debut interest-rate swap to satisfy creditors as part of a USD365 million bank facility it is in the process of arranging, said Phil Reese, treasurer in Wilmington, Del. In the swap, Conectiv will look to convert half of a proposed USD365 million floating-rate bank facility into a fixed-rate obligation. Reese declined to provide further details of the bank facility.
Reese said the company, which already makes extensive use of over-the-counter energy derivatives, has not used interest-rate derivatives in the past because the process requires authorization from regulators and its board. However, swaps referenced to bank debt are exempt from these restrictions, he said, adding that the banks involved in the syndication require that a portion of the floating rate loan be converted into a fixed rate in order to reduce floating rate risk for Conectiv. Donna Kinzel, assistant treasurer, said the lenders have set this criteria because if interest rates escalate to a level that is much higher than currently expected, they run the risk of the project cash flows being insufficient to make the floating rate interest payments. "This will be our first one; [the banks] are trying to manage a standalone project finance deal and they want to manage their predictability," Reese noted, adding, "and we see [interest-rate swaps] as a useful tool." Reese declined further comment.
Conectiv is in the process of merging with Washington-based Potomac Electric Power Co., also know as Pepco. The merged entity will be the largest electricity delivery group in the region.
