Utility Revenues Used to Back Bonds; Source of Cash (ETR)

by: Sandy Cohen

The Wall Street Journal had a worthwhile article in Friday's paper on how utilities are using revenues that are dedicated to specific purposes to back bonds to provide the utilities with cash upfront, writes utility analyst Sandy Cohen. The process used is called "securitization," and has been used by utilities to raise cash to buy back both debt and stock with revenues that were specifically dedicated to recover the costs utilities had built up over the years that could no longer be recovered in competitive environments.

Securitization has also been used by many other industries, in particular to raise money based on known revenues from industries that have customers give 12 month or longer contracts (such as the Alarm industry and the Insurance industry).

See the link for the full article: WSJ Article on Securitization (paid subscription required).

In this article, the WSJ points out that revenues allowed bty regulators for recovery of storm damages could be used to support the issuing of bonds. This would give the utilities in need of fast cahs, a more immediate use of the proceeds. The Florida utilities have just received permission to sue this tool, in the aftermath of the hurricanes of last year. I would expect ETR to get relatively quick permission to do the same in the aftermath of the Hurricanes Katrina and Rita.

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