Texas Utilities Plugging Into ABS Market

March 26, 2004

Texas Utilities Plugging Into ABS Market

Power companies in Texas plan to sell more than $6 billion of asset-backed securities within the next year, if they can dodge an expected wave of opposition from consumer activists.

The largest deal would come from CenterPoint Energy, which is still working on a year-old plan to issue $4 billion of bonds. Texas New Mexico Power, meanwhile, is looking at a $373 million deal and Texas Central, a subsidiary of American Electric Power, is hoping to complete a $1 billion transaction. Those offerings, scheduled for the fourth quarter of this year — or the first quarter of 2005 at the latest — would follow a $790 million transaction that Oncor Electric Delivery expects to close in the next few months.

Houston-based CenterPoint plans to present its proposal to the Texas Public Utility Commission on March 31. The commission will likely respond by the end of August. Texas New Mexico of Fort Worth is gearing up for an April 14 hearing on its plan and expects to hear back from the commission by June 24. American Electric is eyeing the second half of the year to ask the commission for permission to conduct its offering. Dallas-based Oncor has already received all necessary approvals for its plan.

Each of the companies wants to sell bonds to recover investments in assets that were rendered uneconomical by the deregulation of the state’s electricity industry in 2002, as well as costs associated with certain pollution-control equipment. Their deals would be backed by special fees tacked on to consumers’ electricity bills.

But the timelines for the offerings could turn out to be too optimistic, since consumer-advocacy groups will likely oppose the charges. While the fees usually cause electricity bills to rise by less than 5%, they would come at a time when power costs are already projected to rise in Texas.

Oncor is the only one of the bunch that isn’t vulnerable to potential delays, since its deal is already approved. The company’s offering will probably contain three triple-Arated tranches with average lives of three, seven and 10.4 years. Banc of America, Bear Stearns, Citigroup, Credit Suisse First Boston, Merrill Lynch, M.R. Beal and Wachovia are in the underwriting syndicate, although lead managers haven’t been chosen yet.

Any of those banks would have a good shot at winning assignments on the other deals, as long as they are able to achieve strong pricing on Oncor’s transaction.

Texas New Mexico is working with securitization advisor Goldman Sachs. It’s the only other company in the group that has selected an advisor. However, Goldman isn’t assured the bookrunning assignment, since Texas law gives the state’s Public Utility Commission, its advisor, Saber Partners, and the issuer the authority to jointly name underwriters. Under Saber’s unusual approach, that generally doesn’t happen until an issue is about to hit the market. The process, aimed at achieving the best possible pricing for deals, allows Saber to base its recommendations on the underwriters’ recent performances in the new-issue and secondary markets. It also ensures that the same teams of professionals remain on the deals throughout the underwriting process.

Centerpoint’s deal would be the largest stranded-cost securitization ever.