Fitch Affirms Homer City Funding's Pass-Through Bonds at 'BBB-'

CHICAGO--Fitch Ratings affirms the 'BBB-' rating on Homer City Funding, LLC's (HCF) $830 million ($747 million outstanding) senior secured pass-through bonds due 2019 and 2026 and assigns a Stable Rating Outlook.

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 is indirectly owned by Edison Mission Energy (EME; Fitch Issuer Default Rating of 'BB-'). 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, HCF's rating reflects its stand-alone credit quality and is not constrained by the rating of EME.

The rating affirmation reflects HCG's financial performance, which has been consistent with other investment grade merchant power projects. Cash flows continue to provide considerable cushion for payment of senior rent. The senior rent coverage ratio was approximately 3.6 times (x) in 2007 and is expected to exceed 2.0x in 2008. Average gross margin increased in 2008 over 2007, but energy revenues were lower primarily due to reduced generation from extended planned overhauls and increased forced outage rates. Operating and maintenance expenses were higher due to overhauls, outage repairs and increased capital expenditures for emissions compliance and other projects. No major overhauls are planned for 2009, and Fitch expects that recent repairs and upgrades will improve availability. 2008 expected results are based on third quarter 2008 compliance filings and discussions with HCG management; audited results for calendar year 2008 will be available by March 2009.

HCG benefits from a low marginal cost of production, but is heavily exposed to price volatility in the electricity market as a merchant generator. HCG manages energy price risk through a combination of bilateral agreements, forward energy sales and spot market sales into the PJM Interconnection and New York Independent System Operator. Fitch expects senior rent coverage to fall moderately in 2009 due to lower energy pricing resulting from low natural gas prices. Lower energy prices are expected to be partially offset by increased generation and higher capacity prices due to participation in the PJM Reliability Pricing Model auction. HCG complies with all current emissions regulations using a combination of controls technology and emissions allowances. Fitch will address the credit implications of new or revised emissions regulations for HCG as they become known.

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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