— Richard Hitt,
General Counsel of the West Virginia
Public Service Commission
The State of West Virginia’s Public Service Commission (PSC) retained Saber Partners in early 2006 as its financial advisor for the first-ever environmental securitization bond offering in the country. Saber was then rehired in 2009 to oversee a follow-on transaction and navigate the bond market post the 2008 financial crisis with a 19-year maturity bond.
First Transaction: 2007
Approximately $500 million in bonds were offered in two transactions in cooperation with Allegheny Power-Energy, Inc.(NYSE:AYE), parent company of Monongahela Power and Potomac Edison, wholly-owned subsidiaries of the company. These utilities are two of the state’s largest investor-owned companies that serve West Virginia electric customers. Saber Partners acted as the financial advisor to the PSC – in a unique and influential role – helping to structure an offering with the PSC that resulted in accomplishing the Commission’s goals and resulting in substantial savings to consumers compared to all similar transactions in the country.
The PSC’s primary goal was to ensure that the utility’s financing and construction of state-of-the-art environmental control equipment at Monongahela Power’s Fort Martin Generating Plant was completed at the lowest cost to consumers.
After a competitive process that included firms such as JP Morgan and Bear Stearns, the PSC chose to partner with Saber, whose proven successes and team of executives with years of service in the private sector and with public sector authorities and commissions were key factors in the choice.
Saber advised the PSC in how to best protect ratepayer interests during each financing and developed a set of “best practices” for the issuance of these special types of bonds. The “best practices” were detailed in a special PSC “financing order.”
The successful sale on April 11, 2007 of $459.3 million in bonds, with an issue of $344.5 million made to Monongahela and one of $114.8 million made to Potomac Edison, respectively achieved the lowest credit spreads of any similar bond issue ever sold in the market at that time.
At the conclusion of the bond offering, the PSC estimated that ratepayers would save approximately $130 million on the overall financing of the new equipment.
Type of Utility Securitization Transactions: Significance for National Market
The sale of Environmental Control bonds, as Ratepayer obligation charge (ROC) bonds or Rate Reduction Bonds (RRB) as they are also known, were the first of their kind as a result of legislation passed in 2005 by the West Virginia Legislature. This special legislation authorized the PSC to permit their sale and place conditions on the utility that would protect consumers and achieve the lowest cost of the bonds at the time of offering. The bonds are backed by a surcharge on consumer’s electric bills, implemented through a financing order issued by the PSC. These type of bonds were groundbreaking in that, while issued by the electric utilities, they used the powerful state regulatory authority to guarantee repayment through a reasonable surcharge, lower than those used in traditional utility financing methods.
ROC/RRB bonds are authorized by utility regulators in 19 states, though only West Virginia and Wisconsin at present allow them for financing environmental control equipment. Moreover, the West Virginia PSC offering provided investors with a safe and secure investment while significantly lowering the cost of financing environmental compliance. Neither the credit of the utility nor that of the state is affected by the financing.
At a time when utility companies are forced to meet increasingly high standards put forth by state and Federal governments’ stricter regulations, the long-term positive environmental impact of these efforts was obvious. Construction and installation of the equipment at the Fort Martin plant increased employment, benefiting the state economy, and continued the use of West Virginia-mined coal, a precious and abundant local resource. It also helped reduce mercury and sulfur dioxide emissions, along with smog and acid rain, something of the utmost importance to the PSC when the global green imperative couldn’t be more acute. Allegheny Energy’s goal was to see a lowering in emissions of 90,000 tons each year.
According to Richard Hitt, General Counsel of the West Virginia Public Service Commission, the Commission was impressed from the outset with Saber’s unmatched experience on similar transactions in other states, recognizing their proactive approach in protecting the ratepayer’s interests. Saber’s expertise and judicious proceedings helped lead to the bond’s receipt of AAA credit ratings from the three nationally recognized rating services, the highest rating available and one which eliminates, as stated in the prospectus filed with the SEC, “effectively eliminates for all practical purposes and circumstances any credit risk” associated with repayment of the bonds.
Second Transaction: 2009
In July of 2009, the utility and consumer groups filed a petition to reopen the 2007 proceedings to create a second bond issuance. This time it would be in an amount up to $105 million for ratepayer obligation charge bonds, for a total of $564.3 million to date.
According to Hitt as to why Saber was re-hired, the Commission felt that Saber demonstrated “exceptional performance” over the course of their dealings with the WVPSC. “Saber’s initial work in 2006 and 2007 allowed the Commission to approve and implement a follow-on transaction in 2009 after the 2008 financial crisis, in an efficient manner that protected ratepayer interests and allowed the financing of the project well below the utility’s original proposals.”
Saber helped negotiate a unanimous settlement among all the parties in the case which was memorialized in a “Joint Stipulation Agreement” which identified Saber’s previous work and recommended that the PSC re-hire Saber to implement the transaction.
Both the 2007 and 2009 transactions were the lowest cost transactions in terms of both issuance expenses and interest rate credit spreads compared to similarly structured and AAA-rated bond offerings for other utilities at the time of the offering.