Natural gas securitization deal arrives two years after Texas winter storm

Texas is plowing ahead with a massive bond sale to recover extraordinary costs incurred by natural gas utilities during a fierce 2021 winter storm with a deal that allows for a redemption in the event the state's overflowing coffers are tapped to ease the blow to customers who will be paying off the debt.

The taxable $3.5 billion Texas Natural Gas Securitization Finance Corporation customer rate relief bonds are slated to price Wednesday and Thursday with Jefferies leading an underwriting team that shrank with the removal of co-managers UBS and Citigroup.

The deal was made possible by a 2021 state law authorizing securitization financing for natural gas providers to extend the period over which their customers pay back sky-high costs due to spikes in demand and prices for the essential commodity during Winter Storm Uri, which pounded Texas and other states with snow, ice, and high winds amid record-low temperatures. In February 2022, the Railroad Commission of Texas adopted an irrevocable financing order, authorizing the bond issuance and charges needed to pay off the debt.

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An optional limited make-whole redemption over the next three years was added to the deal's structure after Texas House and Senate budget bills introduced in January each included a statement of the legislature's intent "to provide funding to meet obligations" issued by the corporation pursuant to the state's 2021 securitization law or similar legislation passed during the current session. 

Details of the Republican-controlled legislature's plans have yet to surface as lawmakers eye spending plans for the state's projected record-$33 billion budget surplus.

The Texas Bond Review Board's approval in February of a deal structure that "allows the legislature to appropriate funds to further defray costs to ratepayers" is supported by Gov. Greg Abbott, according to Andrew Mahaleris, his spokesman. 

"Gov. Abbott looks forward to continuing to work with the legislature as they work on legislation to mitigate Texans' natural gas costs this session," he added.

Lee Deviney, executive director of the Texas Public Finance Authority, which formed the nonprofit corporation last year for the purpose of issuing the bonds, did not directly answer questions about the possibility of postponing the pricing until the legislature takes action, replying in an email: "The corporation will implement legislative policy." 

The bonds' pricing was originally targeted for mid-August and later expected in November, before it was delayed that month by the Bond Review Board for a full review. The board finally approved the deal with the optional redemption Feb. 17. At that meeting, the cost of issuing the bonds was pegged at $26.16 million, while the monthly retail customer charge to pay off the debt based on an interest rate assumption of 5.98% was estimated at $4.68 through 2039 if the bonds were not redeemed.

Since Aug. 15, the 10-year Treasury, a key benchmark for pricing taxable debt, has increased to 3.96% from 2.79%.

Texas consumer advocates questioned selling the bonds at this point.

"I don't understand why they just wouldn't wait for the legislature," said Sandra Haverlah, president of Texas Consumer Association, noting while the session concludes at the end of May, the legislative budget board could act to provide funds sooner. 

She added that the state failed to do anything about the "textbook example of price gouging" that took place back in 2021. 

"It's going to fall to the consumer or the state can pay for it out of our huge surplus, which is from consumers anyway since most of it is from sales tax revenue," Haverlah said.

The deal is structured with about half of the bonds having a final maturity date in 2035 and the other half in 2041 with scheduled final payment dates in 2033 and 2039. 

"It is anticipated that all principal will be paid by the scheduled final payment date, but final principal payments could be made up to the final maturity date," Deviney said.

The bonds will be paid off with charges added to customer bills by natural gas utilities, subject to a true-up mechanism that will adjust the charges to levels necessary to ensure timely debt service payments.

Atmos Energy and CenterPoint Energy account for most of the deal's aggregated regulatory asset determination amount. A portion of CenterPoint's asset determination will be paid to Summit Utilities Arkansas due to its purchase of CenterPoint's Texarkana customer base. 

Bluebonnet Natural Gas, Corix Utilities, EPCOR Gas Texas, SiEnergy, Texas Gas Service, and Universal Natural Gas make up the rest of the utilities in the securitization. The companies provide natural gas to about 4.4 million customers in Texas.

While the deal's structure is similar to other securitizations, it is unique in that it includes multiple utilities in the same transaction, allowing for a diversification of the ratepayer base, according to Richard Villareal, an analyst at Fitch Ratings, which assigned an expected rating of AAA to the bonds. 

"This charge is being applied across the state rather than in one particular area," he said. "In our opinion, that's a positive."

In Oklahoma, which was also socked by the 2021 winter storm, the state's development finance authority last year issued $2.89 billion of triple-A-rated taxable ratepayer-backed bonds on behalf of four gas and electric companies in separate deals. 

The Texas bonds also received preliminary triple-A ratings from Moody's Investors Service, and Kroll Bond Rating Agency.

In its rating report, Kroll noted the increasing prevalence of alternative and clean energy sources in Texas has the potential to disrupt the customer base for the charges and the amount collected. 

"However, this risk is mitigated by both the true-up adjustment and relative upfront and ongoing costs of natural gas compared to other alternatives," the report said, adding a 2021 state law prevents local authorities from restricting customers' energy sources, such as mandating only electric power. 

CreditSights analysts said they expect spreads for the structured finance securities to be wider than for similar traditional municipal credits. 

"Nonetheless, we expect strong demand for these index-eligible securities from investors seeking to add a new issuer to their (investment grade) portfolio," a CreditSights' report on Friday said.

The corporation chose an underwriting team in May, then dropped UBS from the deal in October, followed by Citigroup in February.

Citigroup's removal followed the Texas attorney general's office January action barring the bank from participating in municipal bond deals after determining its commercial firearms policy runs afoul of a 2021 state law prohibiting government contracts with companies that "discriminate" against the gun industry.

The Texas comptroller's placement of UBS on a list of fossil fuel industry boycotters in August, under another 2021 law, disqualified it from state and local government bond issues.

The preliminary official statement contains notices for potential investors in several countries. Jefferies officials did not respond to questions about whether the taxable bonds will be marketed overseas. 

Deviney said the underwriting syndicate still includes "several banks with global reach at both the senior, co-senior, and the co-manager level."

Morgan Stanley and HilltopSecurities are co-senior managers and the remaining co-managers are Barclays, Blaylock Van, Loop Capital Markets, Piper Sandler & Co., Raymond James, Siebert Williams Shank & Co., and Stifel.

Estrada Hinojosa & Company is the issue's financial advisor; Norton Rose Fulbright is bond counsel; McCall, Parkhurst & Horton is disclosure counsel; and Locke Lord is issuer counsel.