February 5, 2002
Texas Utility Bond Offering Sets Record Low Yields Resets Market Levels for Deregulation “Transition” Bonds: Ratepayers to Save Over $350 Million
NEW YORK, Tuesday, February 5, 2002: Texas ratepayers will save over $350 million from the sale on Thursday January 31 by CPL Transition Funding, LLC of approximately $797 million asset-backed bonds, backed by charges on electric bills in the Central Power and Light Company (“CPL”) of Texas service territory. The so-called “stranded cost” or “transition” bonds are part of Texas’ electricity deregulation plan enacted in 1999. Goldman Sachs led a team of underwriters that priced and sold the bonds. CPL Transition Funding, LLC, is a wholly owned subsidiary of CPL a subsidiary of NYSE: AEP.
“Texas electric customers are the winners here,” said Commissioner Becky Klein of the Public Utility Commission of Texas (PUC) which provided for the transaction in a financing order. “Customers will benefit from a well-crafted electric restructuring plan and the cooperation of utilities and the PUC through its financial advisor, Saber Partners.”
“It appears that the CPL bond sale has set a new pricing standard and reset the asset-backed market for transition bonds” said Joseph Fichera, CEO of Saber Partners which is acting as financial advisor to the PUC. Fichera led the PUC’s team in negotiations with the underwriters. The extremely low credit spreads (that is, the interest rate premium on the transition bonds that reflects their related credit risk compared with yields on similar risk-free U.S. Treasury securities) indicate that the market is recognizing the underlying value of the transition bond structure, as well as the premier strength of the Texas deregulation law and power market environment in particular. These bonds were priced at spreads of from 7 to 34 basis points above the appropriate pricing index. Previously, similar securities have priced at spreads from 9 to 67 basis points. (A basis point is 0.01%.)
Moreover, the CPL bond issue is the first ever electric utility asset-backed bond to price on top of or below the yields on comparable credit card receivable backed bonds, the asset-backed market’s “gold standard” or highest quality security. “Goldman Sachs, Bear Stearns, Credit Suisse First Boston, Merrill Lynch and Salomon Smith Barney did an outstanding job educating the market, and the result was landmark pricing.” Fichera said.
Under Texas’ deregulation law, the PUC was required to achieve the “lowest transition bond charges consistent with market conditions and the terms of the financing order.” The proceeds of the bonds will be paid over to CPL who will use them to retire CPL debt and equity. By replacing the more expensive costs of the outstanding debt and equity with these bonds, savings of more than $350 million are created for ratepayer.
The PUC is currently considering a settlement with TXU Electric Company for a similar financing later this year. A previous financing for Reliant Energy was completed in October of 2001.