In a market where securitization deals are few and far between and where creative structures have taken a back seat to plain vanilla transactions, the Louisiana Utilities Restoration Corp. (LURC) is proving that innovation can still create value.
Under the Louisiana Restoration Corp. Act in 2007, LURC was established to offer alternative financing for utility restoration costs associated with damages from Hurricanes Katrina and Rita.
Last week, the entity launched almost $1 billion in system restoration bonds, split up between two deals under servicers Entergy Louisiana and Entergy Gulf States Louisiana. Both servicers are utility companies operating under the Entergy umbrella organization but covering different regions of the state. Citgroup Global Markets and JPMorgan Securities are co-lead underwriters on the transactions.
Utility bond securitizations to repair hurricane damages are not new to the state, which recently issued storm recovery bonds in March for Cleco Power. Before the Cleco deal, however, which took two years to gain regulatory approval, Louisiana utilities had never issued securitized bonds to finance storm restoration costs.
The transaction used a traditional utility-owned special-purpose entity to issue $180 million in triple-A-rated bonds that were secured by a property right to receive a per-kilowatt-hour charge from Cleco's retail electric customers. Credit Suisse arranged the transaction.
However, the LURC deal differs from Cleco because the special-purpose entity is set up by the state. The issuer is not part of Entergy; it is a public authority, the Louisiana Public Facilities Authority (LPFA). Traditionally, the property right in these deals is created at the utility and then sold in a true-sale fashion to the special-purpose entity. However, in the LURC deal, the property right is never created as part of the utility; it is created at a state-owned special-purpose entity, the LURC, which will make a capital contribution to Entergy to cover the costs incurred through the storm damage. The utilities in this transaction are merely the servicers.
"The use of this structure preserves the credit quality and other investor protections found in similar ratepayer-backed bonds," said Terry Friddle, partner at Pathfinder Capital Advisors. "It provides for potential and substantial incremental benefits for ratepayers in Louisiana." Pathfinder is the financial advisor to the LPFA and has overseen the transaction from start to finish. The firm also served as financial advisor on the Cleco deal.
The structure is expected to result in lower costs to ratepayers relative to a traditional securitization structure where there is a utility as the sponsor for the special-purpose entity, as some of the tax savings accruing to Entergy under this transaction are passed on to utility ratepayers, said Ruchira Dabas, director in the ABS group at Fitch Ratings.
"There are a lot of interesting elements to this deal," an ABS market participant said, especially given the cookie-cutter deals that have come to market recently, he said.
There is also a shorter tenor of the bonds relative to recent deals, which reduces the risk of technological change, demographic changes or shifting usage patterns, Fitch said.
Alternative Utility Usage
But while the deal structure might be new for the disaster recovery segment of the market, the ABS industry has seen similar transactions using a government entity as an intermediary for a utility securitization.
These types of transactions, however, have traditionally been seen in transition bond deals, such as those issued in the mid-1990s in states like California or Massachusetts. Often, these deals helped cover the costs associated with moving to a competitive utility environment, which include system changes and upgrades.
These types of structures have also been used for securitizations with environmental purposes, for example funding a cleanup to meet state environmental regulation standards.
"Currently, there are over thirty different series of bonds outstanding that use either state-sponsored special-purpose entities or utility special-purpose entities," said Sarah Repucci, senior director in the ABS group at Fitch.
Earlier this year, CenterPoint Energy in Houston issued almost $488 million in ratepayer-backed bonds to finance transition charges associated with moving the state to a competitive retail electric market, a process that was ordered by the Public Utility Commission of Texas, beginning in 2001.
Part of the allure in these securitizations is that they are a very versatile asset. "[These utility tariff bonds] are becoming increasingly versatile and can be adapted for a whole host of funding purposes in the future," Dabas said.
The LURC transaction is a one-off deal for Entergy, according to a source close to the transaction.
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