SWEPCO Storm Recovery Funding LLC, a wholly owned subsidiary of Southwestern Electric Power Company (SWEPCO), is selling a $336.7 million Series 2024-A Senior Secured Bonds issuance, according to Moody's.
The rating agency assigned provisional ratings of (P)Aaa (sf) to the A-1 one tranche of senior secured storm recovery bonds with a legal final maturity date of September 1, 2041. Pricing is not finalized.
The transaction is the first utility-cost-recovery-charge (UCRC) securitization sponsored by SWEPCO. The company, (SWEPCO, Baa2 LT issuer rating stable) is the standalone securitization sponsor, seller, depositor, and servicer of the recovery property backing the bonds.
The U.S. Bank Trust Company, National Association (A2/A1(cr)/A2 negative, a2) serves as the trustee.
The deal requires semi-annual and more frequent interim true-up adjustments at the discretion of the servicer, and an equity contribution equal to 0.50% of the initial aggregate principal of the bonds.
SWEPCO is a regulated public electric utility servicer to roughly 234.8 million retail electric consumers in Northwestern and central Louisiana, western Arkansas, east Texas and areas of north Texas, owned by American Electric Power Company, Inc. (AEP; Baa2 stable).
Moody's says the storm recovery property rights that will secure the bonds include a special, irrevocable non-by-passable charge (known as the storm recovery charge) paid by all SWEPCOs existing and future customers in the Louisiana Public Service Commission (LPSC) jurisdictional area. While SWEPCO customers in Arkansas and Texas will not accrue any storm recovery, charges.
SWEPCO will use the proceeds from the issuance of the bonds to recover certain storm recovery charges (SRCs) related to hurricanes Laura and Delta and winter storm Uri. The transaction will fund a new storm recovery reserve of $150 million, approximately $45 million of which, among others will help recover losses from June 2023 storms.
An irrevocable Financing Order grants the issuer the right to adjust the SRCs semiannually and use a quarterly "true-up adjustment mechanism" as credit enhancement, to ensure timely bond payments through maturity. A relatively low initial SRC with no cap, and the stability and experience of the servicer support the transaction's credit strengths, the rating agency said.
The transaction also benefits from a non-impairment pledge in the State of Louisiana Electric Utility Storm Recovery Securitization Act. It pledges to bondholders that the state "will not take or permit any action that would impair the value of storm recovery property… until the bonds are paid in full, except as dictated by the true-up adjustment mechanism."
Challenges include the potential for insufficient collections, and a relatively high exposure to industrial and commercial customers that represented 42% of SWEPCO's base rate revenue in 2023. Since energy consumption by non-residential customers depends on the business cycle and is more volatile compared to residential customers, initially 56.4% of the cash flows will derive from residential customers, according to Moody's.
Moody's considers the risk of potential disruption of cash flows stemming from physical climate events, social and governance credit risk, or general ESG risks, to be low and largely mitigated by various features of the transaction.
