As power companies fight to survive in a competitive market, they are beginning to look to the public asset-backed securitization market for a steady source of cash.
Traditionally utilities have placed only small, private securitizations. One typical deal was Portland General Electric's sale last month of the rights to $80.7 million of future electric bills in a conduit deal arranged by CIBC Wood Gundy.
But large utilities will soon be securitizing billions of dollars worth of assets, bankers and credit graders say, because deregulation means many companies will struggle to collect the bills generated by building nuclear power plants during the days when they had a monopoly.
"Competition is coming, and the rates utilities charge may not be sustainable," said Kevin Mullaly, director of asset-backed securitizations at CIBC Wood Gundy. "There's going to be some pressure to cut those rates, but at the same time recover some costs."
Utility deregulation and securitization are farthest along in California. In August, the state's Legislature passed a law to end utilities' monopolies and to provide for issuing $10 billion in "rate reduction bonds" to help utilities move to an open market.
The offerings, which will be paid off by future electricity receivables, are not expected to come to market until late next year, said Michael Sagges, director at the global power group of Fitch Investors Service.
In the meantime, investment banks are knocking on the utilities' doors to help structure offerings. Morgan Stanley is said to be working with Pacific Gas and Electric, and Salomon Brothers is said to be working with Southern California Edison. Chase Securities, a unit of Chase Manhattan Corp., which helped organize a $202 million securitization offering last year for Puget Sound Power & Light Co. in Washington, is also advising utilities.
Bankers say the trick is structuring the deals so the new asset class will be palatable to money market funds, banks, insurance companies, and other investors who like asset-backed securities for their low risk. Credit rating agencies have so far granted AAA grades to the few utility securitizations brought to market.
Without investor interest, the future for large utilities would look quite grim. Many of them bore enormous costs building nuclear reactors years ago, which they have paid off by passing them along to their captive customers.
But in a deregulated market, with customers theoretically able to buy power from the lowest bidder, these costs will be much more difficult for utilities to recover. The utilities' "stranded cost" bills could reach anywhere from $50 billion to $200 billion, said Lowell Klosky, director of finance and accounting at Edison Electric Institute, a utilities trade association.
"Securitization's a win-win situation," Mr. Klosky said. "It's beneficial to customers because they can save money from deregulation, and it's good for utilities because it provides them with a steady source of funding."
Still, there are risks for investors. The biggest worry stems from the deals' length - expected to be 15 years or more. That's much longer than a typical asset-backed securitization.
Nor are the bonds in California guaranteed by the state or the utilities. Although California's deregulation statute seems to prevent customers from leaving utilities en masse, the effects of deregulation are uncertain and many customers may switch to upstart power suppliers.
"Securitization is not the solution to the utilities' problems," said Bob Gillham, managing director at Chase Securities' global power group, "but it's a powerful tool."
