American Electric Borrows $800 Million to Recover Stranded Costs

March 13, 2012

By Darrell Preston

American Electric Power Co.’s Texas unit is set to close the sale of $800 million of top-rated bonds backed by customer charges to recover costs of investments made before deregulation affected the industry.

A 10-year bond sold at yields more than 20 basis points lower relative to benchmark swap rates than a CenterPoint Energy Inc. sale in January, according to data compiled by Bloomberg. An AEP security maturing in seven years was priced 18 basis points lower while one due in three years sold at 1 basis point over the benchmark. A basis point is 0.01 percentage point.

CenterPoint’s sale produced higher yields, measured against a benchmark swap index, than most of the Houston-based company’s similar long-term debt, raising costs for 2.2 million Houston- area consumers by about $47 million, according to data compiled by Bloomberg.

“It’s difficult to recover from a bad pricing, but this is a step in the right direction,” said Joseph Fichera, chief executive officer of New York-based Saber Partners LLC and a former adviser to the state on similar bond sales.

Under a Texas Public Utility Commission order, customers of AEP Texas Central Co. pay a fee to cover the cost of interest and principal on the bonds. The securities were priced March 8 by another unit, American Electric Texas Central Transition Funding LLC, in a deal led by Morgan Stanley. The commission order helps to obtain AAA grades on the debt from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.

Stranded-Cost Recovery

In Texas, the second most-populous U.S. state, deregulation of the electric-utility industry began in 2002, in a move aimed at fostering competition and reducing rates. The enabling law let companies recover so-called stranded costs, or investments made when regulators set prices. The unit of Columbus, Ohio- based American Electric serves about 787,000 customers in southern Texas.

The commission must try to minimize the effects of stranded-cost debt on ratepayers, under the law. In CenterPoint’s sale, the relative yield compared with a benchmark swap index was almost a full percentage point higher and triple that of most similar longer-term issues from the company, which has sold $5.4 million of such bonds.

The American Electric sale hasn’t been approved by the state utility commission, Terry Hadley, a spokesman, said by e- mail. “There is still time for a commissioner to bring up the issue at an open meeting so it is not quite final,” he said.

Compared in absolute terms, the yield on the American Electric debt also beat CenterPoint, which was up until the latest sale the lowest of 12 recorded. The American Electric bonds carried a weighted average rate of 2.28 percent, said Pat Hemlepp, a spokesman. CenterPoint’s rates averaged 2.5 percent. The company was “pleased” with the outcome, Hemlepp said.