The Florida Public Service Commission's staff last week recommended that Florida Power & Light, a Juno Beach, Fla.-based utility company, be allowed to tap the securitization market for about $659 million. If the power company completes the transaction, it will use the funds to cover storm recovery costs.
The recommended amount is $562 million less than what the Florida Power & Light originally asked to securitize when it submitted its request last January. It originally asked to raise $826 million to reimburse it for costs incurred during the 2005 storm season; another $213 million would cover costs from 2004 storms, and $650 million would be used to replenish its storm damage reserve. From an initial $1.7 billion in total costs requested for recovery, Florida Power & Light subtracted $651 million in income taxes to get to $1 billion.
If the commissioners approve the staff members' recommendations when they meet next week, Credit Suisse is expected to act as lead manager on the deal. The commission can also decide to increase or reduce the proposed amount.
If allowed to proceed, the Florida Power & Light securitization will be part of an estimated $3.6 billion in utility deals to hit the market this year, according to Joe Fichera, CEO of New York-based Saber Partners, which will be the Florida Public Service Commission's financial advisor. Other deals in the works include a $380 million offering from Allegheny Power in West Virginia; a $450 million transaction from Wisconsin Electric Power Co.; and a $1.8 billion deal from AEP Texas Central Co. Word also has it that the Jersey Central Power & Light hopes to raise $200 million through securitization, in a deal to be led by Goldman Sachs.
There currently appears to be plenty of demand in the securitization market for these types of bonds, especially among overseas investors, Fichera said. He added that last December, for example, about one third of the bonds from the $1.8 billion Centerpoint Energy Transition Bond Co. were sold to investors overseas.
"Some investors were selling U.S. agency bonds and buying these for the arbitrage," Fichera said. More arbitrage plays like these lie ahead, especially when, in some cases, agencies come in at 20 basis points below swaps, while utility bonds price in the mid-single digit range over swaps. Also, U.S. utility bonds have a risk weighting of just 20%, compared to 100% for most ABS deals.
Florida Power & Light, like other investor-owned electric utilities in Florida, operates through a self-insurance program funded by a so-called storm damage reserve, according to a memorandum from the commission. By 2004, the company depleted its $354 million reserve after Hurricanes Charley, Frances and Jeanne incurred $890 million in storm-related costs. Although the commission allowed the utility to recover $533 million of the deficit through a monthly surcharge on consumers for a period of three years, it did not address replenishment of the reserve.
In particular, the staff recommended that $200 million be raised to restore the utility company's storm damage reserve.
"Clearly $200 million isn't going to do much to cover the reserve," said Bill Swank, a spokesman for Florida Power & Light. "We believe that $650 million is the appropriate amount to put into the reserve."
If the commission withholds approval for the power company to raise the funds through securitization, the firm will ask to add a $5.19 surcharge to consumer monthly power bills. The surcharge, in addition to the existing $1.65 surcharge for 2004 storm damage recovery costs, would begin appearing on consumers' bills on June 15, and every month after that for three years, according to the memorandum. The surcharges would recover its estimated 2005 storm costs and add $650 million toward the storm damage reserve.
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