Electric Utility Securitizations

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Traditional utility securitizations, enabled by statute in approximately 17 states, have been used numerous times over the past 16 years to recover “stranded costs” resulting from deregulation, and environmental/pollution control equipment, storm damage, reconstruction and deferred power procurement costs.  The following potential benefits of these securitizations are generally recognized in the industry:

  • Immediate recovery of financed costs upon the sale of the bonds to investors
  • Ability to use the proceeds from the issuance of the bonds to pay existing higher cost debt
  • Principal and interest on the bonds and other financing costs are generally paid from charges paid by customers
  • Improved credit metrics (while the debt issued in the securitization typically will appear on the electric utility’s consolidated balance sheet, rating agencies generally ignore the debt for credit analysis purposes because it is an obligation of the SPV issuing the debt and not the electric utility)
  • Lower debt costs as compared to traditional utility debt due to higher credit ratings on securitization debt (typically AAA)

Electric utility holding companies with multiple utility subsidiaries in one state considering a securitization should also consider a single securitization involving two or more of their electric utilities using a pass-through trust structure. This structure involves the formation by each participating electric utility of a SPV which issues bonds to a SPV statutory trust which, in turn, issues SEC-registered pass-through certificates backed by the bonds to public investors. Potential benefits of this structure include:

  • Reduced SEC registration, rating agency, legal and other issuance costs and other efficiencies and economies of scale as a result of a single securitization for multiple participating electric utilities as compared to issuance costs for a separate securitization for each electric utility, resulting in lower costs to electric utility customers
  • Ability of an electric utility to participate with other electric utilities in a multi-utility securitization where securitization on a stand-alone basis otherwise may not have been feasible for economic, statutory, regulatory or other reasons
  • Reduced SEC reporting, rating agency and other ongoing administrative and operating costs and other efficiencies