The Chapter 11 bankruptcy filing Monday of a large-scale electric power cooperative underscores the fallout from February's market failure of Texas' deregulated electrical grid after a deep freeze gripped the state.
Brazos Electric Power Cooperative’s Chapter 11 filing came as rating agencies warned of downgrades for the state’s public utilities and cities that provide power.
With more than 1.5 million customers in Central Texas, Brazos said the filing was designed to “maintain the stability and integrity of its entire electric cooperative system.”
“Before the severe cold weather that blanketed Texas with sub-freezing temperatures February 13-19, Brazos Electric was in all respects a financially robust, stable company with a clear vision for its future and a strong ‘A’ to ‘A-plus’ credit rating,” the non-profit cooperative said in announcing the move.
The co-op had $1.8 billion in secured Federal Financing Bank notes and $480 million drawn from a $500 million line of credit through Bank of America, according to one of its
When temperatures fell to near zero across the state for four days, knocking many of the state's non-weatherized generation plants off line, prices for power on the main state grid operated by the Electric Reliability Council of Texas surged to as high as $9,000 per megawatt hour. The grid shed about 40% of its power amid rolling blackouts, some of which lasted as long as three days. The Public Utilities Council of Texas ordered electric providers to buy power from ERCOT rather than shutting down power. About 60 deaths have been reported as a result of the deep freeze.
“As a cooperative whose costs are passed through to its members, and which are ultimately borne by Texas retail consumers served by its member cooperatives, Brazos Electric determined that it cannot and will not foist this catastrophic financial event on its members and those consumers,” the firm said in a news release.
“As a result of the catastrophic failures due to the storm, Brazos Electric was presented with excessively high invoices by ERCOT for collateral and for purported cost of electric service, payment of which was required within days,” the firm said.
Brazos Electric is the wholesale power supplier for its 16 member-owner distribution cooperatives and one municipal system.
Rating agencies have placed public utilities and cities with their own utilities on watch for possible downgrade in the wake of the storm that brought blackouts and nearly caused the collapse of the Texas grid.
Gov. Greg Abbott made the electricity crisis an emergency item for the Texas Legislature, which held two days of committee hearings on the matter last week. President Joe Biden, who declared 77 counties of Texas a disaster area, visited the state last week.
Brazos filed in U.S. Bankruptcy Court in Houston after midnight, listing debts of $1.8 billion to ERCOT, and $480 million to Bank of America. Brazos reported about $1 billion in revenues last year and about $3 billion in assets.
Fitch Ratings last week placed all 19 of its Texas public power utilities that use ERCOT on its watch list for possible downgrade, including the City of Austin and San Antonio’s CPS Energy.
Exorbitant power purchase prices during the storm “have triggered Fitch's concerns regarding funding requirements and liquidity in the near term, and cost recovery and the potential for increased financial leverage over the medium term for its rated issuers,” analysts said.
Fitch lowered Brazos' rating to D after the filing.
Brazos, rated A by S&P, was on S&P’s CreditWatch with negative implications, along with Brownsville (A-plus), Garland (A-plus), Georgetown (AA-minus), Golden Spread Electric Cooperative (AA-minus), and the Lower Colorado River Authority (A).
The largest utility on the ratings watch is the City of San Antonio’s CPS Energy, whose senior-lien debt is rated AA by S&P.
The negative outlook “reflects the magnitude of the utility's revised estimates of the costs of procuring electricity and natural gas during the week of Feb. 14 that will add to its debt burden, pressure its rate-making flexibility, and potentially weaken its financial performance," said S&P Global Ratings credit analyst Scott Sagen.
S&P also revised the outlook to negative from stable and affirmed its AA-minus rating on the city of Denton’s utility debt.
The city has already approved an amended ordinance and related documents in order to upsize the maximum amount of its commercial paper program to $300 million from $100 million. The authorizing resolution permits the city to issue both tax-exempt and taxable notes.
"The outlook revision is based on our view that there will be a heightened likelihood that Denton's municipally owned combined electric, water, and wastewater utility could suffer diminished financial capacity as a result of purchased power and natural gas prices that skyrocketed during the week of Feb. 15, 2021, as extreme winter weather plagued the entire state," said S&P Global Ratings credit analyst Ted Chapman.
In the wake of the crisis, five of ERCOT’s 16 board members resigned.
“It will take some time for a full understanding of the damages and economic cost of the storm, but there is no doubt that it will be massive,” said Texas economist Wayne Perryman. “Based on what we know at this point, we estimate the net loss in gross product over time will exceed $100 billion, with personal income losses of $70 billion and hundreds of thousands of lost years of work.”
