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Securitization, Mach II

Green investments require bulletproof financing.

Fortnightly Magazine - August 2008

to those of the related utility. Shortly thereafter came Entergy Gulf States’ authorized and partially consummated Louisiana 26 and Texas 27 transactions: The Texas transaction—Entergy Gulf States Reconstruction Funding’s $329.5 million of its Series A Senior Secured Transition Bonds—was rated AAA by Standard & Poor’s and Aaa by Moody’s and appears to have closed in July 2007 (Entergy Gulf States’ senior secured rating at the time of issuance was BBB/Baa3), 28 however, in the Louisiana transaction—Entergy Louisiana Hurricane Recovery Funding—only preparatory SEC filings have been made for an offering of senior secured storm-recovery bonds. 29

More recently, Cleco Katrina/Rita Hurricane Recovery Funding issued $180.6 million of its 2008 senior storm recovery bonds rated AAA by Standard & Poor’s and Aaa by Moody’s in April 2008, and once again the bond ratings were superior to those of the servicing utility—CLECO Power, whose senior unsecured rating at the time of issuance was BBB/Baa3. 30

Synthetic Carbon Reduction

With growing certainty that greenhouse gas (GHG) emissions will become regulated due to climate-change concerns, many affected industries actively are exploring ways to avoid, reduce or eliminate GHG emissions. Of course, fossil-fired power generation is significantly affected, especially coal-fired generation. Coal-fired power plants in the United States emitted almost 2 billion metric tons of CO 2 equivalent in 2006, 31 representing almost one-third of the total 2006 GHG emissions in the United States.

With large-scale carbon reduction technology, including carbon capture and storage (CCS), for fossil-fired power generation not projected to be commercially available until around 2015, plant owners—and even more acutely, developers and sponsors—face limited and mostly unattractive options in pursuing coal-fired power plant development or retrofit. These options include waiting to see what the carbon-reduction requirements will be, while running the risk that appropriate technology might not be available on commercially reasonable terms. Second, developers and plant owners might opt for some unproven technology and hope that it works as projected. Third, they might anticipate likely carbon-reduction requirements and satisfy such requirements “synthetically” through tradable carbon-reduction instruments. 32 This third option buys time in which to determine the most appropriate technology to effect the anticipated carbon-reduction requirements and, theoretically, to allow for the most cost-effective means of achieving such carbon reduction.

Interestingly, in the case of several proposed fossil-fired power plants, community objections to carbon emissions (even though technically unregulated) led to negotiated commitments by plant sponsors to implement carbon-emission reductions. 33 Because it is impractical immediately to replace coal-fired capacity with alternative sources, including renewable energy or nuclear generation, the need to deal with anticipated climate-change requirements that limit or otherwise restrict emissions of carbon dioxide has become a significant issue in the near-term. This is particularly so because of announced new U.S. coal-fired power plants, with an aggregate capacity of around 50 GW, and an ever increasing number of plants either being abandoned or significantly delayed due to community objections 34 or regulatory concerns 35 regarding possible carbon constraints. In fact, the North American Electric Reliability Corp.’s annual 2007 Long-Term Reliability Assessment 2007-2016 36 found that long-term capacity reserve margins are inadequate and