April 3, 2007
West Virginia Utilities Borrow for Pollution Costs
By Michael Quint, Published in Bloomberg News / BusinessWire
April 3 (Bloomberg) — Two units of Allegheny Energy Inc. sold $459 million of triple-A rated bonds backed by a surcharge on customers’ bills in the first ever offering of ratepayer- backed bonds to pay for pollution control equipment.
Potomac Edison Co. and Monongahela Power Co.’s 500,000 electric customers in West Virginia will save money on the sale because the interest cost for the new bonds was more than 2 percentage points below their parent’s 7.62 percent cost of capital, according to data compiled by Bloomberg.
Yields on the new bonds were the lowest relative to Treasuries among any of the $40 billion of ratepayer-backed bonds sold by utilities since 1997. Bonds due in 10 years sold at 5.23 percent, 56 basis points more than comparable Treasury notes. A basis point is 0.01 percentage point.
“We got the record low spreads by educating investors about the credit quality of these bonds, which is closer to U.S. agencies than the asset-backed bonds they have been compared to in the past,” said Joseph Fichera, chief executive officer of New York-based Saber Partners LLC, the financial adviser to the West Virginia Public Service Commission for the sale.
Ratepayer-backed bonds are authorized by utility regulators in 19 states, though only West Virginia and Wisconsin allow them for financing pollution control equipment. U.S. electricity generators may spend almost $50 billion by 2025 for equipment to reduce sulfur and other emissions, according Dan Riedinger, a spokesman for the Edison Electric Institute, which represents publicly traded utilities.
More Flexibility
By selling debt backed by charges on customers’ bills, the units of Greensburg, Pennsylvania-based Allegheny Energy benefit because they get money needed for new scrubbers at a coal-fired power plant, and the bonds aren’t counted as liabilities on their balance sheets, leaving more flexibility for future borrowing.
The 10-year notes were priced to yield 19 basis point more U.S. agency securities, down from a 23 basis-point spread for ratepayer bonds sold by a unit of Columbus, Ohio-based American Electric Power Co. last October.
The bonds sold through First Albany Capital and Loop Capital. In addition to the 10-year bonds, the sale included a four-year issue at 4.98 percent, 16-year securities at 5.46 percent and 20-years at 5.52 percent.
The new bonds carry the highest triple-A ratings and are safe enough that the Securities and Exchange Commission allowed the preliminary prospectus to say that supports for the bonds “effectively eliminate, for all practical purposes and circumstances, any credit risk to the payment of the bonds.”
Bond Backing
West Virginia law and rulings by utility regulators require the companies to add a charge to every customer’s monthly bill, now estimated at about $5 for the average household, and keep it high enough to pay the bonds’ principal and interest when due. The state doesn’t guarantee the payments, though it has pledged not to modify the law allowing the charge to consumers, according to the utilities’ regulator.
All the utilities’ customers, including the state and local governments are obliged to pay the extra charge, and “share in the liabilities of all other electric service customers” the prospectus says. That means if customers default or leave the area, those remaining must pay more.
Saber, whose name is printed on the front page of the preliminary prospectus above the underwriters, had a more prominent role in the bond sale than is usual for financial advisers, Fichera said. The West Virginia regulators wanted an adviser to help make sure they got the best deal possible for customers.
Never Downgraded
The triple-A ratings assigned to all utility ratepayer bonds have never been reduced, even when the parent utility whose name is on the bonds went bankrupt. That’s a better record than top-rated corporate bonds, where about 54 percent of AAA- rated issues are still AAA five years later, according to a Standard & Poor’s report for 1981-2006. For top-rated asset- backed bonds, about 98 percent still have the top rating five years later, according to S&P.
The Potomac Edison and Monongahela Power bonds, with maturities in four, 10, 16 and 20 years, financed a new wet- scrubber at a coal-fired Fort Martin, West Virginia power plant.
By reducing sulfur emissions, the utilities will be able to use locally mined, high sulfur coal for 100 percent of the plant’s needs. About 25 percent of the plant’s coal supply now comes from the Powder River area in Wyoming.
Term Sheet
The term sheet describing the bonds included the yield premium, or spread, over Treasury notes, as is standard in the corporate bond market, not just the spread over swap rates, as is normal for asset-backed securities such as credit-card debt.
The swap rate, the fixed rate that would be exchanged for a floating rate equal to London wholesale bank deposits, is currently 54 basis points greater than the 10-year Treasury note.
The bonds are the first backed by ratepayer charges to qualify for NASD’s corporate-bond trade reporting system, TRACE, allowing investors to monitor trading after the sale. Asset- backed securities, the category assigned to earlier issues of ratepayer-backed bonds, aren’t reported to TRACE.
— Editor: Williams.
— Story illustration: To see a yield curve of bonds sold by BBB-rated utilities see { FMC 39 }. For news on utility bonds, see {TNI UTI BON }. For Allegheny Energy’s weighted-average cost of capital, see {AYE WACC }.
To contact the reporter on this story: Michael Quint in Albany, New York, at (1) (518) 426-9921 or mquint@bloomberg.net.
To contact the editor responsible for this story: Beth Williams at (1) (212) 617-2307 or bewilliams@bloomberg.net.
