December 12, 2005
CenterPoint Energy Expands Mkt For Utility Tariff Bonds
By Allison Bisbey Colter Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones) — A $1.85 billion utility fee securitization from CenterPoint Energy (CNP) attracted a number of first-time investors in the U.S. and abroad, pointing to a much broader market for these securities.
The offering, which was sold Friday in five tranches, is part of a plan to finance the deregulation of Texas’ electricity market, which began in 2002. It is backed by a special charge levied on retail customers in the Houston utility’s 5,000 mile service area, which has approximately 1.9 million customers representing about 20% of the entire Texas electricity market.
But other Texas utilities such as American Electric Power (AEP) and Texas New Mexico Power could issue similar bonds late next year if the state approves pending applications.
“The offering is expanding the investor base for these types of securities and will benefit similar utilities and their ratepayers in other states,” Joseph Fichera, chief executive of Saber Partners and the financial adviser to the Texas Commission, said in a statement Monday.
Like many utility tariff bonds, CenterPoint’s latest offering has a credit enhancement feature known as a “true-up” mechanism. This means that if fee revenue falls because customers leave the service area, CenterPoint can raise the tariff on the remaining customers to make up for the shortfall, thus ensuring timely interest and principal payments to bondholders.
But Centerpoint marketed the bond as being even less risky than similar offerings. For one thing, the utility has the ability to adjust the fee as often as every six months, which the prospectus says is more frequent than true-up mechanisms on similar bonds.
And according to the prospectus, customers are required to make the payments even if they elect to purchase electricity from another supplier or generate their own power, or if the CenterPoint goes out of business and its service area is acquired by another utility.
“Credit risk, for all practical purposes, is effectively eliminated,” Albert Yoshimura, a managing director at joint bookrunner RBS Greenwich, said in the video presentation that was part of the offering’s virtual roadshow.
And unlike similar offerings, CenterPoint’s utility tariff bond was assigned a 20% risk weighting by the U.K. Financial Services Authority, according to the prospectus. That’s the same risk weighting assigned to debt issued by U.S. housing agencies Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Home Loan Banking System. All three benefit from an implicit government guarantee, since many investors assume that Uncle Sam would make good on their debt in the event of default.
That risk weighting was key to the offering’s appeal to overseas investors, according to a person familiar with the transaction, who said the deal attracted over $1 billion in orders from Europe alone. Among other first-time investors in utility fee bonds was an Asian central bank as well as a major U.S. investor that bid for an entire tranche, this person said.
As a result, CenterPoint was able to upsize the offering from an original $1.25 billion and price it at much tighter spreads than similar deals. The $250 million two-year A1 tranche was sold at spread of 4.75 basis points under London inter-bank offer rate, or 42 basis points over Treasurys. That compares favorably with spreads on two-year utility tariff bonds in the secondary market, which have been indicated at around 3.0 basis points under Libor.
But it’s still a far cry from the agency market, where Fannie’s most recent two-year benchmark note was trading at 28 basis points over Treasurys Monday.
The $368 million five-year tranche was priced flat to Libor, the $252 million 7.5-year tranche at a spread of 5 basis points over Libor, the $519 million 10-year tranche at a spread of 7 basis points over Libor and the $462 million 13-year tranche at a spread of 13.5 basis points over Libor.
Fichera said the state of Wisconsin is considering a similar bond offering for its utilities to finance “environmental costs” that could come in the first half of 2006. He said a similar bond is being considered in West Virginia and Florida.
Saber Partners is a finanical adviser to the Wisconsin and Florida Commissions.
Copyright (c) 2005 Dow Jones & Company, Inc.