In the News: Recent Developments

October 4, 2006

American Electric Power Sells $1.74 Billion of Bonds for Costs

By Darrell Preston Published in Bloomberg News / BusinessWire

October 4 (Bloomberg) — AEP Texas Central Co., a unit of American Electric Power, the biggest U.S. electricity producer, sold $1.74 billion of bonds at top credit ratings to recover costs incurred before power markets were deregulated.

AEP sold the triple-A bonds to recover investments in generating plants from before deregulation in 2002. Investment banks led by Credit Suisse, JPMorgan and RBS Greenwich Capital Markets set yields ranging from 4.972 percent in the 2010 maturity to 5.304 percent in the 2020 maturity.

The bonds won top ratings because the Texas Public Utility Commission pledged to set customer charges at a level to repay the debt. The interest rates were the lowest relative to benchmarks of any of the state’s previous sales, said Barry Smitherman, a member of the commission, in a statement.

“Competition has led us to the best outcome in these transactions to date,” said Smitherman.

The sale marks the last of $6.4 billion of bonds sold for so-called stranded costs under state legislation passed in 1999 authorizing utilities to recover their investments in generating capacity, said Terry Hadley, spokesman for the Texas commission.

More than 70 buyers from around the world put in orders for the bonds including Pfizer Corp., the state of Kentucky and the Employee Retirement System of Texas, said Smitherman. The bonds also drew buyers from the Industrial and Commercial Bank of China and investors in Ireland, said Joseph Fichera, chief executive of Saber Partners LLC, the utility commission’s financial adviser.

The sale included three more maturities: 2013 with a 4.989 percent yield; 2015 with 5.094 percent; and 2018 with a 5.174 percent yield.

Record Beat

The yield in the 10-year maturity was 0.06 percentage points over the Libor swap index, a benchmark for comparing yields on bonds sold to recover costs. That was 4 basis points better than a similar bond for Jersey Central Power & Light in August and 1 point better than CenterPoint Energy Inc.’s sale by Texas in December 2005, said Fichera. A basis point is .01 percentage point.

“Texas beat its own record,” said Fichera. “It paid substantially less than the last transaction.”

Texas may sell additional bonds backed by customer charges after lawmakers approved a measure earlier this year allowing such bonds to help utilities recover the costs of rebuilding after hurricanes.

In the U.S. about $30 billion of bonds backed by ratepayer charges have been sold. The bonds typically have the highest possible ratings and low borrowing costs because of utility commission pledges to set rates at a level to repay investors of the bonds.

For AEP Texas, monthly charges are expected to rise $3.46 for residential customers using 1,000 kilowatt hours of electricity. The utility has about 680,000 customers in south Texas.

The Texas legislature, when it approved retail electric power deregulation in 1999, allowed utilities to recover as stranded costs their investments in power plants that would have been recovered under rates before deregulation.

Editor: Servetah

To contact the reporter on this story: Darrell Preston in Dallas at (1)(214) 954-9454 or at

To contact the editor responsible for this story: Beth Williams (1) (212) 318-2307 or at

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