With deregulation taking its toll on the energy markets in California, observers are awaiting news from the state legislature stating that additional stranded-cost securities may be warranted to bail out the utilities.
Despite the ambivalent nature of the California securitizations, New Jersey's Public Service Enterprise Group (PSEG) is readying a $2.5 billion deal.
The eight-tranche deal is expected to close late this month, according to Paul Rosengren, a spokesman for PSEG. The deal, lead-managed by Lehman Bros., consists of seven fixed-rate classes and one floating-rate class.
According to Rosengren, investors should not judge this deal based on the issues plaguing California's utility companies.
PSEG was not required to sell its generating plants, as California companies had to do. Instead, the plants were transferred to a subsidiary within the company. Furthermore, New Jersey regulators allow hedging and forward-purchasing options that are absent in California.
"So [PSEG] reduces the risk there of being caught with unbelievably high spot prices ... and that is a major exasperator of the problem in California," Rosengren said, adding that the deal is also structured to be low-risk.
California-based utilities Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric are being threatened with insolvency because rate caps do not allow them to pass on the higher cost of energy to consumers, which has skyrocketed in that state since deregulation went into effect in 1997. Securitization was done during that time period to ease the changeover to a deregulated market, and there is a possibility additional securitization could help bail them out this year.
The market seems to have priced in the fact that the problems in California are unique to the state. Spreads on the 4.5-year tranche Pacific Gas & Electric 1997-1 have widened considerably since Dec. 15, to Swaps +40-43. Comparably, the 3.5-year PECO 1999 A4 tranche is at Swaps +20.
"The paydown in the [California] bonds has been in line with our rating levels," said Eric Hedman, a managing director at Standard & Poor's Ratings Services. "Collections have been in line with our rating levels. Obviously, with everything that's going on, we continue to monitor the performance on the bonds."
"The biggest risk you have on the stranded-bond transactions is declining usage, and it's fair to say that all the transactions to date, there really is no significant usage decline," added Bern Fischer, a director with S&P.
However, Governor Gray Davis has been vague on the issue of allowing additional securitization. "They wouldn't necessarily be parity bonds with the existing debt," Fischer said. "They might be new securitizations complementing perhaps the existing securitizations. His plan has been less than specific. There's a lot of things being discussed."
But some have interpreted Davis' remarks as negative, and now it seems less likely that the California stranded-cost securitizations will come to fruition. "We were thinking a day or so ago that securitization [in California] would provide a new class of stranded costs...this would be the godsend or the remedy or fix-it tool," said Jeff Salmon, director of asset-backed research at Barclays Capital. "But it appears now that the governor is saying he is not really supportive of that as a bailout-type tool."
