DALLAS - The Louisiana State Bond Commission gave preliminary approval on Thursday for a plan to issue $1 billion of taxable utility system revenue bonds supported by a 10-year surcharge on electric customers in the state.
The bonds will be issued by the Louisiana Public Facilities Authority to provide $721 million of proceeds to Entergy Louisiana LLC and $291 million of proceeds to Entergy Gulf States Inc. The money will reimburse the utilities for their costs of restoring the electrical delivery systems after hurricanes Katrina and Rita in 2005, and establish a restoration reserve of $250 million for future storms.
The financing plan has been endorsed by the LPFA, the Louisiana Utility Restoration Corp., and the Public Service Commission. The Bond Commission gave its initial approval to the plan on a 7-3 vote.
Michael Twomey, Entergy's vice president for Louisiana regulatory affairs, said the surcharge on ratepayers would be less with the lower interest rates associated with bond financing than if the restoration costs were recovered through rates.
In addition, Twomey said, the companies expect the Internal Revenue Service to rule that the revenue generated through the surcharge, which could be dedicated to debt service on the $1 billion of bonds, is not taxable income.
If that is the case, he said, the companies will realize some $280 million in tax savings over the next 10 years. He said Entergy guarantees a pass-through of $40 million of the anticipated savings to ratepayers, regardless of whether the IRS rules the income to be non-taxable revenue of the corporation.
Twomey said the IRS is unlikely to rule on the issue for at least four to five years. He said stockholders would benefit by $240 million, with only $40 million allocated to ratepayer relief with a favorable ruling because the company was taking most of the risk if the surcharge is determined to be taxable income and therefore should enjoy most of the benefits.
State Treasurer John Kennedy, chairman of the Bond Commission and a Republican candidate for U.S. Senate, opposed the Entergy bond issue. He was not swayed by several assurances that debt service on the bonds could not become a liability of the state.
"I've seen things happen in the capital market over the last six months that I thought would never happen," Kennedy said. "What happens if this surcharge isn't enough to pay the debt service? What happens if Boone Pickens buys Entergy and decides he doesn't want to do business in Louisiana? What happens if another storm comes along and devastates this region, and all your customers move out?"
"This gives me great, great pause," he added. "I look at the risk and the reward, and the risk is just so dramatic."
Kennedy also questioned the need for Entergy to create a $250 million storm restoration fund from the bond proceeds.
"You're taking $250 million out of taxpayers' pockets and putting it into your pocket in case there is a storm," he said. "I think it would be better left in the taxpayers' pockets."
Entergy Louisiana supplies power to 640,000 customers in southern and northern Louisiana. Entergy Gulf States has 350,000 customers in a service area that stretches from the Baton Rouge area to the Texas border.
