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Utility Tariff Bonds. NARUC Accounting and Finance Meeting Sharon Bonelli, Managing Director October 10, 2007 Jackson Hole, WY. What is Securitization?. A form of debt financing that involves: Legally isolating a pool of financial assets

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Utility Tariff Bonds

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Utility Tariff Bonds

NARUC Accounting and Finance Meeting

Sharon Bonelli, Managing Director

October 10, 2007

Jackson Hole, WY


What is Securitization?

  • A form of debt financing that involves:

    • Legally isolating a pool of financial assets

    • Repackaging the asset cash flows into a liability structure

    • Creating securities that are backed by those assets

    • Providing for loss protection on those assets

    • Selling the securities to investors in the capital market

  • Common securitization asset classes: CMBS, RMBS, CDO, ABS

www.fitchratings.com


Utility Tariff Bonds Defined

  • Bonds backed by “tariff property” which represents the right to collect a per kilowatt-hour tariff from a utility’s retail electric customers

  • Tariff property is established to fund a specific purpose, ie. costs to transition to a competitive market, environmental projects, etc.

  • The tariff property is a future flow (a “regulatory asset”), reflecting revenues from future customer billings

  • Bond structure incorporates conventional securitization features and additional features based on unique nature of the collateral

www.fitchratings.com


Conventional ABS vs. Utility Tariff Bonds

* Credit cards, auto loans, student loans, etc.

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Transaction structure

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Corporate Bonds vs. Utility Tariff Bonds

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Environmental projects

Monongahela Power Co./Potomac Edison Co. (2007)

Wisconsin legislation passed

Louisiana legislation passed

Hurricane recovery costs

Florida Power & Light Co. (2007)

Entergy Gulf States Inc. (2007)

Cleco (expected 2007)

Any utility purpose - Idaho legislation passed

Bankruptcy reorganization

Pacific Gas and Electric Co. (2005)

Tariff Bond Structure Adaptable to New Applications

www.fitchratings.com


Tariff Bond Market Characteristics

  • Fitch has rated $39.8 billion of utility tariff bonds since 1995 (99% of issuance volume)

  • 40 transactions currently outstanding

  • Since late July, secondary bond spreads have been widening across the ABS market more than traditional high grade utility bond market, including tariff bonds

    • Will the historically wider cost differential between ‘AAA’ utility tariff bonds relative to on-balance sheet utility debt return in the near term?

www.fitchratings.com


Tariff Bond Spreads vs. ‘BBB+’ Corporate Bonds

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Tariff Bonds Have Stable Performance to Date

  • Tariff bonds are performing as expected

  • ‘AAA’ affirmed on all 40 rated transactions in August 2007

  • Shortfalls mainly attributed to weather variance with true-ups effectively adjusting collections

  • Uninterrupted collections during servicer bankruptcies (NorthWestern, PG&E)

www.fitchratings.com


ABS Tariff Bond Rating Criteria – Six key areas of focus

  • Legal and regulatory framework

  • Transaction structure

  • Utility as servicer

  • Credit analysis

  • Self-generation and alternate technologies

  • Cash flow models and stress cases

www.fitchratings.com


Rating Criteria: Legal & Regulatory Framework

  • Tariff established as a property right by law and regulatory order

  • Tariff established as irrevocable; state nonimpairment pledge

  • Nonbypassability

  • Legal true sale & bankruptcy remote issuer

  • Successor servicer provisions

  • True-up: annual, interim, nonstandard

  • Third party energy providers

  • Perfected, first priority lien in transition property granted to indenture trustee

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Rating Criteria: Transaction Structure

  • Time-tranched notes

  • Principal amortization schedule

  • Credit enhancement

    • True-up

    • Capital subaccount

    • Reserve subaccount

    • Overcollateralization subaccount

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Rating Criteria: Servicing

  • Consumption forecasting

  • Customer credit evaluation process

  • Collections policies

  • Billing and remittance procedures

  • Commingling of funds

  • Successor servicer

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Rating Criteria: Credit Analysis

  • Customer base

    • Concentrations

    • Historical performance

  • Cyclical & seasonal patterns; consumption variance

  • Tariff level

  • Self generation & alternate technologies

  • Cash flow analysis

    • ‘AAA’ stress case

    • Break-the-Bond stress case

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Tariff Bond Use Impact on Utility Corporate Credit

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Adjustments to Financial Statements for Tariff Bonds

  • Fitch’s power team adjusts financial statements to deconsolidate tariff bond debt related cash flows in its utility rating analysis, as follows:

    • Subtract interest and principal payments on tariff bonds from revenue line item

    • Add principal payment to depreciation and amortization line item

    • Add interest payment to interest expense line item

    • Subtract tariff bond debt from long term debt and current portion of long term debt on the balance sheet

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Related Research

  • “Rating Criteria for U.S. Utility Tariff Bonds”, August 30, 2007

  • “U.S. Utility Tariff Bonds: Adaptability of an Asset Class,” Aug. 30, 2007

www.fitchratings.com


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