U.S. Power Firm Hedges I-Rate Risk

  • 10 Feb 2003
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Southern Power Co., the wholesale power subsidiary of Atlanta-based energy giant Southern Co., plans to unwind approximately eight forward starting swaps with a total notional size of around USD500 million when it prices a bond issue of approximately USD600 million that is planned for June. Mike Harreld, senior v.p. and treasurer at Southern Company Services, the power firm's service arm, explained that the swaps were entered into in increments over the last 18 months, with Southern paying a fixed rate and receiving a LIBOR-based floating rate. Harreld declined to specify the rates.

The swaps were entered in order to lock in attractive fixed rates in anticipation of the bond issue, which will pay a fixed-rate coupon, explained Harreld. Forward starting swaps allow Southern to lock in a fixed rate that will be similar to the bond's coupon, with any gain or loss made by the hedges when they are unwound to be offset in the bond's pricing.

The swaps may also aid Southern to meet its earnings goals, Harreld added. The company has signed several contracts to sell power from plants under construction, with each contract having embedded in it an assumed financing rate, he explained. By locking in lower rates of debt than the financing rates are assumed to be, Southern may be able to beat its earning forecast, he said.

The bond sale is being made in order to support the completion of the Harris 1, Harris 2 and Franklin 2 power plants in Alabama, all of which are approximately 600 MW facilities, said Harreld. If these projects are delayed the bond issue will similarly be pushed back, he noted.

The swaps were made with several counterparties, all of which are banks the firm has longstanding relationships with, noted Harreld. These include Citibank, Commerzbank Securities and Wachovia Securities. The firm has not yet decided which firm will lead manage its bond sale.

  • 10 Feb 2003

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