Public Service Electric & Gas (PSE&G) will begin moving forward with its efforts to securitize its stranded costs following a decision last Wednesday by the New Jersey Supreme Court to uphold the restructuring and securitization orders.
Through the order issued by the New Jersey Board of Public Utilities, PSE&G will initiate the sale of $2.5 billion of securitization bonds, the proceeds of which will be used to retire outstanding debt and equity, including a 2% rate reduction for its customers as a result of the securitization and the financing of a subsidiary, PSEG Power LLC.
"We're probably looking at some time in the first quarter for actual issuance by PSE&G," said Richard Cortright, a utilities analyst at Standard & Poor's Corporate Ratings Group. He added that once PSE&G comes to market, two other New Jersey utilities, Atlantic City Electric (a division of Conectiv) and Jersey Central Power & Light, will file to issue their own bonds late in 2001.
In related news, Michigan utility company DTE Engery Corp. has filed an S-3 with the Securities & Exchange Commission to issue up to $1.774 billion in stranded costs bond through Detroit Edison Securitization Funding LLC 2001-1. The Dec. 1 filing stated that the company would sell seven classes of floating-rate securities. Representatives from DTE did not return phone calls as to when the bonds are likely to be issued.
Turmoil in Texas
While PSE&G has won its court battle, utility companies in Texas are facing major hurdles to get their securitization programs underway. Central Power & Light is awaiting a decision from the Texas Supreme Court on constitutional and statutory grounds. TXU Electric Co. is awaiting a hearing date from the Supreme Court on statutory grounds. Reliant HLMP has no appeals facing its order, but cannot go forward with securitization until the constitutionality of CPL's order is determined.
"Because of the constitutional challenge to CPL's order, it basically prevents any utility from going to market until that question is settled," said Steven Journeay, director of policy development at the Pubic Utility Commission of Texas. "Even though Reliant has an unchallenged order, the bond markets are not going to allow them to go to market while there is an underlying constitutional challenge to the statute that authorizes them to do that."
Those who have filed the appeal claim that securitization of stranded costs in the state of Texas is unconstitutional, and wonder whether there are any stranded costs to securitize.
"There have been a series of statements on the part of PUCT staff that these companies don't have any stranded costs after all, and therefore, if indeed they do these securitizations ... that it might be appropriate to actually require the utilities to give monies back to ratepayers for having given the companies these monies to recover stranded regulatory assets up front when indeed there were no stranded assets," said Peggy Jones, head of fixed-income utility research at Prudential Securities.
The Texas Supreme Court heard the case Nov. 29, and a decision could take anywhere from three to nine months.
"This case may come quicker," Journeay said. "The statute that allows for securitization told the courts that they should give priority to any appeals. I don't know what effect that would have on them issuing an opinion." He added that a decision is unlikely before the Christmas holiday.
Some market players feel the Supreme Court could take its time issuing a decision.
"If I was the Supreme Court, and I thought these people didn't have any stranded costs, I might just take nine months and wait and see how it all sorts out," said a market observer. "The chairman of the commission is extremely tied in politically, and it will be a matter of what he decides to do about the fact that at the moment there's no stranded costs, and does he want to make an issue out of it and stop the securitizations; or does he want to go forward and let somebody else maybe worry about whether there is or isn't stranded costs? Somehow, I suspect the Supreme Court decision may not just be made in a vacuum."
Sources have also indicated that it is likely that Patrick Wood, chairman of the PUCT, might get a position in Washington under a Bush administration.
Journeay said that if the Court upholds the constitutionality of the statute, that Reliant will probably be the first Texas utility to come to the market.
TXU faces a different situation. It, along with the PUCT, is appealing the order on the matter of the amount TXU is allowed to securitize.
The order issued by the PUCT ruled that TXU can only securitize $300 million of stranded costs, while TXU believed the number should be close to $1 billion. The District Court issued a preliminary ruling stating the methodology in which the amount should be determined. TXU stated that if the Court's methodology is applied, the figures come out closer to the $1 billion.
"It's the Commission's position that there are other things that are at issue that should restrict the amount that the company should be allowed to securitize," including whether or not stranded costs actually exist in the state, Jones said.
TXU final reply briefs were due last Friday, and the Court has not yet set oral arguments, which Journeay suggested will probably be in mid to late-January.