Ohio’s FirstEnergy Corp. subsidiaries, the Cleveland Electric Illuminating Company, Ohio Edison and Toledo Edison - are planning a $505 million utility securitization, according to a US Securities and Exchange Commission filing.
The issuer has not yet filed the deal for approval with Public Utilities Commission of Ohio, a spokesperson for the regulator said.
Saber Partners, the New York advisory firm that has participated in the structure, marketing and pricing of about $8 billion of similar offerings in 5 states, said in a report this week that the First Energy's deal is structured with more complexity than almost all previous utility securitizations.
FirstEnergy will receive two times the normal fee seen in previous utility securitizations for acting as servicer of the bonds, according to the Saber report.
Customers will pay the utilities 10 basis points on the principal amount per year vs. 5 basis points paid in the 2009 and 2007 utility securitizations in neighboring West Virginia for the ratepayer obligation charge bonds issued by FirstEnergy subsidiaries, Potomac Edison and Monongahela Power.
There also does not seem to be a corresponding offset above actual cost associated with other utility customer rates that were a part of past utility securitization deals.
Still the structure sticks to the basic rules for utility securitizations. It includes a ratepayer obligation charge on certain consumers' electric bills and a mechanism to adjust rate charges periodically as needed to ensure payments of interest and principal when due. It also provides special legal protections to make the adjustment mechanism “irrevocable and enforceable for the benefit of bondholders.”
Saber believes this offering should be well received based on current credit spreads for corporate and utility bond offerings.
“The best comparables to this bond - are historically narrow or ‘tight’,” according to the Saber report. “Institutional investors are looking for high-quality fixed income investments, and there is a limit to the amount of US treasuries and U.S. Agency debt that they want to buy.”
In October 2012, First Energy’s $555 million deferred energy costs securitization received approval from the PUCO.
It was the first use of Ohio’s Dec. 2011 enacted Securitization Act created by House Bill 364, which allows Ohio’s electric distribution utilities to issue low-interest; long-term bonds to replace certain types of deferred costs that otherwise would have higher carrying costs, resulting in savings for ratepayers.
Saber Partners said in its report that it anticipates more utility securitizations to come to market as utilities, their regulators and state legislators push to lower electricity costs to consumers.
“Securitization can be used to recover storm related costs from Superstorm Sandy as well as environmental and other costs,” according to the report. “Properly structured and marketed … this is the best financing vehicle available for utilities and their customers.”
