Texas is teeing up what could be one of the biggest deals this year in the municipal bond market.
Underwriters are being sought for a taxable bond issue to raise $3.4 billion for extraordinary costs incurred by natural gas utilities during deadly Winter Storm Uri that hit the state in 2021 with responses to a request for proposals due on Friday.
The taxable customer rate relief bonds will be issued through the Texas Natural Gas Securitization Finance Corporation in a deal targeted for pricing in mid-August.
Prospective underwriters are being asked for their experience with ratepayer-backed and asset-backed securitization, as well as with Texas municipal bond issues. They were also asked to disclose their participation in debt issues over $1 billion.
The Texas Public Finance Authority formed the nonprofit corporation to issue the bonds, which will be paid off with charges imposed on customers by eight natural gas utility local distribution companies.
Lee Deviney, the authority’s executive director, told the Bond Buyer Texas Public Finance Conference in late March that prior to the 2021 storm he had no reason to ever think about asset-backed securitizations.
“This is going to be a one-off transaction,” he said. ”It takes up half my time and a lot of bandwidth. I think there’ll be a lot of satisfaction once it gets done because we’ve never done anything of this magnitude before.”
The February 2021 freeze caused widespread blackouts and led to enormous energy bills as prices for electricity and natural gas skyrocketed amid high demand.
Texas is the only state not significantly connected to the two power grids that serve the rest of the United States and Canada, a factor that limited its ability to import power to satisfy heightened demand.
Natural gas utility local distribution companies, which are authorized to directly pass on gas costs without a markup to customers, incurred huge costs for the commodity needed to heat homes and businesses as well as generate electricity.
The Texas Legislature passed a series of bills in response to the storm, including a measure authorizing the securitizations of unpaid balances for electric cooperatives.
For natural gas providers, House Bill 1520 authorized securitization financing to provide customers with rate relief by extending the period over which they will pay the “extraordinarily high gas costs related to Winter Storm Uri,” according to the RFP.
Deviney played down the potential impact on the authority’s biggest-ever bond deal from a state law that has sidelined a few major Wall Street investment banks from the Texas muni market.
“We anticipate significant interest from the underwriting industry including major national and international firms, regional firms and smaller firms,” he said in response to written questions. “We anticipate robust underwriting support and on-the-market pricing.”
The RFP lists several requirements, including that prospective underwriters have verified they do not discriminate against the firearm industry. Under a
Nonprofit corporations acting on behalf of governmental entities are exempt from the law. However, it is being applied to the securitization finance corporation, which is described as “a duly constituted public authority and instrumentality of the State of Texas and a non-profit corporation.”
Bank of America, which announced in 2018 that it would halt financing for companies that manufactured military-style weapons for civilians, was the senior manager in October for taxable asset-backed debt issued by the nonprofit North Texas Higher Education Authority. A bank spokesman has said that deal was outside of the scope of the law.
Legislative sponsors of the firearm law identified Citigroup, JP Morgan Chase, Bank of America, and Wells Fargo as targets of Senate Bill 19 when it was debated a year ago.
Since September, Wells Fargo and Citigroup have remained active in the Texas muni market and were among 38 bond firms that since September submitted letters for the benefit of underwriting syndicate representatives verifying they do not discriminate against the firearms industry, according to a list posted on the Municipal Advisory Council of Texas website.
Citigroup, which announced a U.S.
To be in the natural gas financing, underwriters must also affirm that they don’t boycott Israel or energy companies.
A “good faith effort” will be made to include historically underutilized businesses in the deal, according to the RFP. Deviney said he anticipates receiving proposals from firms owned by minorities, women, and service-disabled veterans.
A determination on whether the bonds will be sold all at once or in separate series “will be made in consultation with financial advisors and underwriters, and taking into account the indications of market demand at the time of sale,” he said.
Deviney added that “underwriters may recommend marketing (the taxable bonds) in certain foreign markets if there is significant demand for the bonds.”
Some of the team for the deal has been assembled with Estrada Hinojosa serving as the corporation’s financial advisor.
Deviney said Norton Rose Fulbright has been appointed as bond counsel and McCall Parkhurst and Horton as disclosure counsel. He added that a corporate counsel is also being sought along with a central servicer, which will be responsible for collecting customer rate relief changes form the gas utilities, remitting the money to the bond trustee, calculating true-up adjustments, and other duties.
Atmos Energy and CenterPoint account for most of the deal’s aggregated regulatory asset determination amount. Bluebonnet, Corix, EPCOR, SiEnergy, TGS, and UniGas make up rest of the eight utilities in the securitization.
Last month, Moody’s Investors Service said the heightened credit risk at A1-rated Atmos that resulted from the February 2021's winter storm “has been largely mitigated” after the Texas Railroad Commission, which oversees the state’s natural gas utilities, approved the securitization finance order in February.
Local government-owned gas and electric utilities are also turning to debt issuance. San Antonio’s CPS Energy
