The cost of a February freeze that caused widespread blackouts in Texas and claimed more than 200 lives continues to weigh on bond issues for electric power, rating reports indicate.
An upcoming $89 million of revenue bonds for Bryan Texas Utilities earned an A-plus from S&P Global Ratings but a negative outlook based on Texas’ troublesome power grid, which failed in the February freeze, costing local utilities millions of dollars in record power costs.
The grid that serves most of the state is called the Electric Reliability Council of Texas, or ERCOT. ERCOT is borrowing $3 billion from the state to clear the power sales that came during the freeze, when prices soared from the average $22 per megawatt hour in 2020 to $9,000 per megawatt hour.
The loan will be repaid from “default charges” assessed to wholesale market participants for a term of up to 30 years.
Bryan Texas Utilities face “relatively higher price volatility, heightened reliability risks, extreme temperature and demand fluctuations, and weaker grid interconnectivity compared with that of other states,” S&P analyst Andrew Bredeson wrote in a report.
Fitch Ratings also has a negative outlook on its AA-minus rating for the utility’s upcoming revenue bonds based on ERCOT uncertainty.
“Market participants continue to face risks associated with ongoing rulemaking and procedural improvements directed by the Texas legislature, and unresolved payment shortfall of approximately $3.0 billion to ERCOT,” said Fitch analyst Kathy Masterson.
Nearby Brazos Electric Cooperative, Texas’ largest and oldest electric generator serving 1.5 million customers, filed for bankruptcy amid ERCOT charges of $2.1 billion for power during the storm.
“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 co-op said in its March 1 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,” Brazos said.
Economists estimate the storm’s impact at between $80 billion and $130 billion in direct and indirect loss.
Economist Ray Perryman, principal at the Perryman Group in Waco, estimated the long-term losses in gross state product from the event at between $85.8 billion and $128.7 billion, with lost income of $56.8 billion to $85.1 billion.
“These amounts are in the range of (and potentially above) the losses associated with the most expensive weather events in Texas to date, Hurricanes Harvey and Ike,” Perryman said.
Joe Hegwood, chief financial officer for BTU and the city of Bryan, told the Texas Legislature that BTU had to pay 154 times the normal price for natural gas that the utility needed to power its generators.
BTU's net storm costs are estimated at about $26.7 million, shared between the city electric system and rural electric system, Masterson said. The cost estimate includes net energy and service costs from ERCOT and natural gas prices incurred during the week of Feb. 13-19.
On May 31, the Texas legislature passed House Bill 4492 and Senate Bill 1580, authorizing use of the state rainy day fund to cover $3 billion of unpaid balances of electric cooperatives and retail energy providers to the wholesale power market.
SB 1580 allows electric cooperatives to securitize their share of the unpaid balance, currently totaling $2.5 billion, while the remaining amount will be covered by default balance financing authorized by HB 4492.
Brazos Electric Cooperative and Rayburn Country Electric Cooperative defaulted on amounts owed to the wholesale market and represent about $2.5 billion of the $3 billion cumulative defaulted invoices.
Two public utilities — the City of Denton and CPS San Antonio — have filed lawsuits against ERCOT, alleging, among other claims, that the default uplift process represents an unconstitutional granting of public funds and an unconstitutional lending of city credit. Uplift refers to certain charges that exceeded the systemwide cap of $9,000 per megawatt hour that were charged to load-serving entities.
Denton had to issue $100 million of commercial paper to finance its purchase of power from ERCOT and said it would still need more revenue to cover costs. Denton’s estimate of $300 million for the week’s power supply was three times what the city bought from ERCOT for all of 2020.
On March 4, Moody's Investors Service downgraded ERCOT to A1 with a negative outlook just two months after affirming the grid's Aa3 rating. Analysts cited "the political and financial fallout resulting from the four-day power outages."
"ERCOT is being heavily criticized by political leaders and other stakeholders, has been subject to several lawsuits, and did not receive $2.5 billion of payments for market transactions due to payment defaults following the cold weather event," said Moody's analyst Toby Shea. "The negative outlook reflects the possibility that the rating could fall further should Texas fail to resolve the weaknesses of its energy infrastructure and associated market design that were highlighted by the outage disaster.
ERCOT, which is organized as a membership-based 501(c)(4) nonprofit, operates the state’s main electric grid and triggered the rolling blackouts when demand far surpassed supply as power plants and gas supplies were crippled by temperatures that fell below zero degrees in some parts of the state. Coal- and gas-fired power plants joined wind turbines in failing amid temperatures that — while routine elsewhere — the Texas facilities were not prepared for.
S&P noted that Texas utilities face increasing risks from climate change.
“In our view, the specter of climate change could weigh more heavily as a credit risk factor for Texas utilities,” Bredeson wrote. “In our opinion, BTU and many other Texas utilities face greater environmental risk than most of their peers nationally.”
The city of Bryan is about 100 miles from Houston and Austin in the College Station-Bryan metropolitan statistical area. Bryan organizes its service area into two electric systems: the city electric system with 39,500 customers and the rural electric system with 22,900 customers.
This week’s deal features $20.4 million for the rural electric system and $68.5 million for the city system.
BTU expects to issue $40.7 million of additional debt in fiscal 2024 to continue the utility's $271.3 million five-year capital improvement plan.
FHN Financial Capital Markets is book runner on BTU's rural bonds, while Barclays manages the city bonds. Specialized Public Finance is financial advisor on both deals.
