In the News: Recent Developments

Pllbllshed April 12 2004, 7:19pm EDT

Three N.J. Utilities to Sell $510 Million of Taxable Bonds

Three utilities in New Jersey plan to issue a total of approximately $510 million oftaxable bonds later this year, according to Mark Beyer, deputy chief economist at thestate Boord of Public Utilities.

The deals, which are known as stranded cost securitizations, have a tariff guaranteemandated under the state’s Electric Discount and Energy Competition Act that cannot berevoked. The EDECA guarantee authorizes the utilities to set rates at a level to payback principal and interest without getting any additional government authorizations.

The bonds are expected to hit the market sometime this year. Each bond offering will beissued through c bankruptcy-remote special purpose entity. The largest offering, between$260 million end $270 million, is expected to come from Jeney Central Power & Light. A$200 million deal will be sold for Public Service Electric & Gas, the state’s largestutility, while Rockland Electric, a subsidiary of Orange & Rockland Utility, is expectedto tap the markets for $50 million, Beyer said.

The bonds are backed by special charges on New Jersey retail electric consumers’ bills.EDECA was enacted in 1999 to help utilities recover certain losses. It stipulates thatratepayers are responsible for repaying reasonably incurred deferred balances, plusinterest.

A similar set of bonds, celled taxable transition bonds, totaling $2.52 billion weresold in 2001. The lead manager on that deal was Lehman Brothen.

New York-based Saber Partners LLC was selected earlier this month to advise on the PSE&Gdeal. Meanwhile, Bear, Stearns & Co. is serving as adviser on the other two. All three deals will be negotiated, Beyer said.

Cltlgroup Global Markets Inc. is serving as the lead underwriter for the PSE&G deai.Underwriters for the others have not yet been selected.

Joseph Fichera, chief executive officer of Saber Partners, confirmed the firm has beenselected as adviser on the PSE&G deal.

The private advisory firm, which was founded in 2000, prevailed over competitors BearStearns, and J.P. Morgan Securities Inc. for that deal. Bear Stearns has historicallyadvised the board on such deals, Beyer said.

“The potential for savings from the activist involvement of Saber Partners in the New Jersey financing process warrant their retention for the Public Service Electric & Gastransaction,” said Fred S. Grygiel, chief economist for the board, in a preparedstatement.

The board expects all three deals to receive triple-A ratings when they come to market.

This tariff guarantee on the bonds cannot be bypassed and is not on the balance sheet ofthe state, nor is it an obligation of the state, but is a unique form of guarantee inaccordance with the EDECA that minimizes almost all credit risk for investors. The actis designed in part to reimburse investor-owned utilities for stranded costs -lossesaccumulated by utilities in 2001 when the cost of purchasing electricity exceeded thecapped rates they are allowed to charge customers.

The bonds are attractive to the issuer because it is able to offer lower yields becauseof the guarantee. Furthermore, it is not seen as debt by the rating agencies because ofthe tariff guarantee. Instead they are categorized as off-balance sheet financing. lnaddition, the issuer gets all the proceeds, but the bill goes to the ratepayers.

Saber has also advised on $3 billion in utility bonds in Texas.

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