Southern Co. has taken steps to shield itself in the event that financially shaky Dynegy Inc. defaults under power supply contracts it has entered into with Southern, Gale Klappa, the electric utility’s chief financial officer, told a gathering of investment professionals last Wednesday.

“We currently have two working contracts with Dynegy,” Klappa noted in an appearance before Morgan Stanley’s 10th annual global electricity and energy conference in New York.

The first deal involves 220 MW of offtake. “Dynegy has signed a contract that runs through mid ’05 for 220 MW of capacity coming out of one of our peaking plants in Georgia called Plant Dahlberg.”

“They are current,” Klappa said. “In other words, Dynegy has paid us up to date and they’ve never actually not paid us on time for their responsibilities under that contract and under a second contract which is 260 MW of capacity that they’re on the hook to take from us through 2011.” That capacity is coming from Southern’s Plant Daniel, a baseload, combined cycle facility located in Mississippi.

Klappa detailed what steps his company has taken to protect itself from Dynegy’s credit and liquidity situation. “We had in the contracts that if Dynegy ever lost its investment grade credit rating…then Dynegy would have to post — with a bank acceptable to us — letters of credit.”

Southern currently has in place a $20 million letter of credit that Dynegy has posted to cover its liabilities on the Dahlberg contract, should it default. “Now, we’re sitting [in] early ’03 [and] that $20 million letter of credit almost completely covers their remaining liability under the Dahlberg contract.”

Under the Daniel contract, Dynegy has posted a $26 million letter of credit. “That would cover us for roughly 15 to 16 months of capacity payments if they defaulted and we draw it straight from the bank if they get behind on their payments.”

The other contract that Southern has with Dynegy is tied to Franklin Unit 3, which is still under construction and scheduled to come online in mid-2005. Dynegy has posted a $50 million letter of credit for this facility. “So if we build the plant, and they’re not in the position to pay us for the offtake when it goes commercial, we can draw a $50 million letter of credit there.”

The entire unit will cost Southern about $290 million “so we would get $50 [million] of that $290 million back immediately.” Southern “has some back up plans for that capacity if the unfortunate thing happens with Dynegy,” Klappa added.

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