More than $3 billion in utility deals are in the works, including four that will expand the use of securitization beyond stranded costs.
Market observers believe more volume is likely to be generated as other states learn how utilities in Florida, West Virginia and Wisconsin are using securitization in new ways: Florida for storm recovery and the other two states for pollution control.
Many also expect utilities to propose even more potential uses for securitization in the future.
"It could be just another financing tool for any capital expenditures," said Joseph Fichera, the CEO of Saber Partners.
His New York firm is the financial adviser for utility regulators in the three states where new deals are being planned.
Stan Wise, chairman of the Georgia Public Service Commission, agreed with Fichera, saying he believes utilities eventually might use securitization to help pay for new infrastructure, such as nuclear power plants.
"We're not hearing much talk about securitization in Georgia yet," Wise said. "But I think, ultimately, there will be consideration of that."
Idaho already opened up the possibility for new twists on utility deals in that state. Though no issuers have emerged yet, the Legislature passed a law last year allowing utilities there to issue asset-backed securities for any purpose that could reduce the rates customers must pay.
More Texas stranded costs
The proposed deals for storm recovery and pollution control are coming along just in time to help compensate for the dwindling supply of stranded costs.
The last of those transactions are expected to hit the market this year, with only about $2 billion in issuance remaining. The next one up is likely to be from AEP Texas Central Co. The utility, which is owned by American Electric Power, is planning a stranded cost deal that reportedly will top $1 billion.
Terry Hadley, a spokesman for the Public Utility Commission of Texas, said the commissioners signed a financing order Feb. 16, allowing AEP Texas to recover up to $1.48 billion in stranded costs. The next step is for the utility to file more paperwork, asking for approval to securitize as much of that amount as possible.
Larry Jones, a spokesman for AEP Texas, said the utility planned to file within a few days seeking approval for the securitization. He could not say what the exact amount would be until the filing occurred.
The Texas commission also recently appointed Saber as its financial adviser for the expected securitization. Saber advised the commission on a stranded cost deal last year, a $1.85 billion issue from CenterPoint Energy Houston Electric.
What's in a name?
As utilities expand the use of securitization beyond stranded costs, new names are being used to describe the deals, adding storm recovery bonds and environmental cleanup bonds to an already long list of monikers.
Fitch Ratings uses a more general term that refers to the source of the assets rather than the use of the proceeds: utility tariff bonds.
But whatever they're called, Fichera is intent on widening the investor base for this asset class in the U.S. and overseas. He recently traveled to Asia to get investors there on board.
He said though the prices are getting tighter - the long duration utility bonds are trading at about the same level as credit cards - the fixed-rate utility bonds are a great value, offering triple-A ratings with no prepayment and no extension risks.
The bonds are backed by a surcharge on consumers' utility bills. A "true-up" mechanism - which Fichera said amounts to a government guarantee - allows the utility to increase that charge to whatever level is necessary to repay the bonds, with the state pledging not to interfere.
Florida is allowing utilities to impose an extra charge on ratepayers to rebuild reserves depleted by storm damage.
At least two utilities, Florida Power & Light and Gulf Power, have filed applications for financing orders with state utility regulators. The financing orders would allow them to issue bonds backed by the charge on customers' utility bills.
Credit Suisse is serving as the adviser for FP&L, which is requesting $1 billion. Gulf Power is seeking $150 million, with Barclays Capital as its adviser.
Several bankers said the proposed deals could help pump new life into a sector that was expected to start winding down. Louisiana is talking about following Florida's lead.
But the mood seemed to be mostly cautious optimism.
"I think there is potential. It's just hard to ascertain how big the potential is right now," said Jay Kim, a managing director at Barclays.
Barclays served as a lead manager on two utility transactions last year, for New Jersey's Public Service Electric & Gas Co. and California's Pacific Gas & Electric Co.
"This is going to create a new avenue for utilities to use securitization as a form of financing," Kim said.
Kim expects interest in these new bonds to come from investors in the stranded cost deals, but he also hopes to attract new buyers.
"We're looking for agency and corporate buyers, along with traditional ABS buyers," he said.
Wisconsin and West Virginia are allowing securitization for utilities that must comply with federal pollution-control regulations.
Wisconsin Electric received approval of its application for a financing order, allowing it to proceed with plans to issue "environmental trust" bonds. Lehman Brothers advised the utility through the filing process.
In West Virginia, an application is pending for Allegheny Power, which wants to issue $380 million in bonds backed by a ratepayer surcharge.
Ellen Lapson, a Fitch Ratings managing director who specializes in covering utilities, said the industry is becoming more familiar with securitization and is looking at it as a useful financing tool beyond stranded costs.
But she said Wisconsin and West Virginia are not the first to see the potential for financing environmental-related expenses. Before the stranded cost deals came along, Puget Sound Power & Light issued the first utility securitizations - a $202 million issue in 1995 and a $35 million issue in 1997 - to finance a state-mandated program encouraging customers to conserve energy, according to Lapson.
"That was a little different because it was for conservation," Lapson said.
The utilities in Wisconsin and West Virginia are installing pollution-control equipment at their facilities, she added.
Another difference is the Puget Sound utility had started charging their customers a tariff to recover expenses for the conservation program.
"They just wanted to monetize it," Lapson said.
With the newly proposed deals, the utilities would use the money from the securitization to comply with the federal pollution-control mandates. Then a tariff added to customers' bills would be used specifically to repay the bondholders.
"The utilities are thinking ahead about how to fund these projects," Lapson said.
Lapson has not heard of any Idaho utilities exploring the idea of securitization.
But the "any purpose" part of the law in that state concerns her.
Lapson favors using securitization only for extraordinary costs, such as storm damage or pollution control. She is concerned that, with Idaho's broad permission to use securitization for lowering rates, some utilities might consider it a tool to offset high commodity prices, reasoning that they can blunt the rate impact of a sharp rise in their fuel expenses by deferring the cost over a longer period.
"I would discourage them from doing that. I don't think securitization should be used for ordinary expenses like fuel," Lapson said. "It would be all well and good if you knew fuel prices would go down in the future. But you may just be piling on more of an expense for consumers down the road."
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