In the News: Recent Developments

March 2, 2016

Utility Securitization Bills Advance in Florida

By Shelly Sigo

BRADENTON, Fla. – Florida lawmakers could soon approve legislation designed to lower borrowing costs by authorizing certain municipal water and sewer providers to issue securitized bonds.

The Utility Cost Containment Bond program was considered in 2014 and 2015, although legislators’ concern over the potential for dramatically increasing municipal debt helped to derail those measures.

This year, concern over the use of debt has subsided and two bills have sailed through committees in each chamber.

The bills are awaiting floor action. The House and Senate bills differ in which issuers would be allowed to use securitized debt to finance projects at what is expected to be significantly lower issuance cost.

Little time remains to work out an accord. Lawmakers are scheduled to adjourn March 11.

Senate Bill 324, sponsored by Sen. John Legg, R-Lutz, passed its final committee Tuesday with a broad definition of the issuers that would be able take advantage of the financing structure.

Legg’s bill would allow “intergovernmental utility authorities” or a separate legal entity created by one or more local agencies such as a municipality or county to issue bonds secured by irrevocable charges on customer’s accounts.

In House Bill 347, sponsored by Rep. Chris Sprowls, R-Clearwater, only intergovernmental utility authorities could issue the bonds.

The Florida Governmental Utility Authority is the only entity that fits the House’s definition.

In addition to financing its own projects, FGUA would be allowed to issue bonds on behalf of other local government entities, and potentially earn fees for doing so.

FGUA sought similar legislation the past two years.

On Tuesday, Sprowls proposed an amendment that would also allow bonds to be issued by an authority comprised of an agency that provides water or wastewater in two or more counties, in addition to a municipality or a county. The agency, the city, or the county must provide services to at least 75,000 customers to use the financing.

Even under the proposed House amendment, if adopted, “significantly more than half the utilities in the state would be cut out of doing this type of financing independently,” said a bond attorney who asked not to be named.

Some states already allow municipal utility issuers to use securitization, and it offers a very effective low-cost form of financing, according to Joseph Fichera, chief executive officer of the New York-based financial advisory firm, Saber Partners LLC.

“Securitization can provide the purest form of an AAA credit without third-party enhancement,” said Fichera, who has advised investor-owned utilities on securitizations.

Because of their structure, in which the bonds are secured by irrevocable charges on customers’ bills at high coverage levels, and are issued by a bankruptcy-remote special entity, such deals usually obtain the highest ratings.

The steady cash flow goes to the trustee to pay the debt.

As a result of the structure and triple-A ratings, a municipal issuer could see a “substantial pick up” in savings if priced correctly, Fichera said.

“The credit enhancement is usually an automatic adjustment of a charge on everyone’s bill, on an essential service that seeks to eliminate political risk through a state pledge of no interference in bondholder’s rights to receive a special charge,” he said.

Such deals are part of the financing for the District of Columbia’s $1 billion electric transmission line undergrounding project.

The Long Island Power Authority has used securitization extensively to refinance outstanding debt and lower its costs using its Utility Debt Securitization Authority as a special purpose issuer.

On Tuesday, the UDSA entered the market for a third time, issuing $635 million of triple-A rated tax-exempt securitization bonds.

The offering was upsized from $387.7 million because of historically low interest rates, agency officials said.

The deal sold at a true interest cost of 2.7%, compared to the average interest cost of 5.2% on the outstanding debt, and saved about $114 million, according to Tom Falcone, LIPA’s chief financial officer and chief of staff.

The UDSA previously issued $2.01 billion of first securitization bonds in 2013, and $1.002 billion in 2015.

“This brings total interest savings to our customers from our strategic debt refinancing plan to nearly $375 million,” Falcone said.

Falcone also said that Tuesday’s rates were about 25 basis points below the UDSA’s sale last year.

LIPA’s general revenue bonds are rated A-minus by Fitch Ratings and Standard & Poor’s, and Baa1 by Moody’s Investors Service.

Florida first allowed investor-owned electric utilities to issue securitized bonds following the severe hurricane seasons in 2004 and 2005, using a nonbypassable charge on the bills of then-current and future customers to obtain low-cost financing to cover storm-related costs and to replenish reserves.

If the current legislation passes, a similar structure would apply to municipal water and wastewater utilities in hopes of lowering borrowing costs. Fichera said he was not aware of any municipal water and wastewater providers that currently issue securitized bonds.

It would also be the first municipal securitization of any kind allowed in the Sunshine state.

The bills before Florida lawmakers would allow a single-purpose, limited liability company to be formed to serve as a conduit to issue the bonds.

State law would prohibit the company from filing for bankruptcy as long as bonds are outstanding.

The debt would be secured by revenues from a separate “utility charge” on the bills of each present and future customer benefitting from water or wastewater services.

Revenues collected on the bills would be transferred to the special purpose entity, and held in trust for the benefit of bondholders.

Separately, bills that propose strengthening requirements imposed on the Florida Municipal Power Agency are struggling.

HB 579 and SB 840, which would require FMPA to do detailed audits and establish fair market value for each of its assets, have not yet cleared committees.

If the bills pass, FMPA would be required to submit its audits to the Public Service Commission, which currently oversees rate setting only for investor owned electric utilities.

Proponents of new auditing requirements for FMPA have attempted in the past to place the agency under the purview of the PSC, a step that could analysts have said could jeopardize FMPA’s credit ratings.

Opponents of the FMPA bills said there is doubt as to whether the legislation will pass this year, although requirements affecting the joint power agency could still be attached to other bills before the session concludes.

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