After an 18-month struggle, the path is finally clear for Houston-based CenterPoint Energy to issue its $1.89 billion stranded cost ABS. Last week, the Texas State Attorney General's office and other groups that had previously opposed the deal agreed not to lodge another appeal, removing the final roadblock for CenterPoint to bring its deal to market. Sources say the deal could be in the market by the end of the year.
The Public Utility Commission of Texas, which has authorized the deal, also announced last week its selection of investment banking firm Saber Partners as financial advisor on the transaction. According to a statement from Saber, the company will "serve as a joint decision maker with CenterPoint Energy on all matters related to the structure, marketing and pricing of the bonds including the selection of the underwriters."
One interesting facet of the deal, according to Saber CEO Joseph Fichera, is that it will likely feature a tranche marketed to European investors. Fichera said CenterPoint will be able to do that because of the favorable risk capital weighting the bonds received from the U.K. Financial Services Authority. All stranded cost bonds from the state of Texas have a 20% risk weighting, comparable to US agency issuers, whereas corporate debt and ABS from other issuers carry 100% risk weighting.
The process of bringing the deal to market began in March 2004, when CenterPoint requested its initial $3.6 billion financing order from the Public Utility Commission of Texas. The $3.6 billion was requested as part of its true-up mechanism associated with deregulation of the industry in 1999.
Last August, CenterPoint was awarded the right to collect $2.3 billion in true-up costs as well as the right to securitize $1.8 billion of that. The company has appealed that decision with the goal of getting a financing order for the other $1.3 billion, but has meanwhile gone ahead with the process of securitizing the $1.8 billion.
That process, in and of itself, has faced its own obstacles. In April, the Texas State Attorney General's office appealed the PUCT's financing order allowing CenterPoint to go ahead with the $1.8 billion deal. Earlier this month, that appeal was dismissed, leaving last Friday as the deadline for any additional appeals.
CenterPoint was optimistic going into the deadline, as they had received early indications that no further appeals would be lodged. Company spokesman Floyd LeBlanc said the company was eager to get the process finished and to proceed with the deal. "The process has been nothing if not unusual," said LeBlanc.
After the announcement that there would be no more opposition to the deal, PUCT spokesman Terry Hadley also expressed the commission's desire to move the deal along as swiftly as possible. The longer it takes to complete the deal, the higher the interest rate CenterPoint will likely have to pay on the bonds. A higher interest rate will translate into a greater rate increase to utility customers in the state.
Though the RRB asset class has mostly been populated with deals such as CenterPoint's, which are intended to finance costs associated with deregulation, a new generation of utility cost bonds are being used to finance disaster recovery and environmental improvement costs. So far, utilities in Florida, Idaho and West Virginia are angling for orders to issue such bonds (see ASR 5/30/05).
Fichera noted that while the deal is expected to hit the market by the end of the year, there are still regulatory hurdles that could delay the deal until early 2006. The deal must recieve a private letter ruling from the Internal Revenue Service, as well as a number of Securities and Exchange Commission approvals. Tom Kelley, spokesman with the Texas State AG's office, did not return a call for comment.
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