Winter Storm Uri-related utility debt securitizations keep coming

Seventeen months after Winter Storm Uri hit the Southwest, state-sanctioned securitizations are queuing up to mitigate a huge spike in energy costs for utility customers, with an Oklahoma deal the latest to come to market.

In February 2021, the region was pounded with snow, ice, and high winds amid record-low temperatures, causing widespread blackouts and resulting in enormous energy bills as prices for electricity and natural gas skyrocketed due to high demand.

The Oklahoma Development Finance Authority on Friday priced the first of four issues aimed at easing the impact on ratepayers by spreading payments over a longer time period with a bond pricing that raised eyebrows for occurring at the end of a summer week.  

Bloomberg News

RBC Capital Markets priced $761.6 million of AAA-rated taxable, non-callable bonds for Oklahoma Gas and Electric Company, the state’s largest electric utility, with interest rates of 4.285% for bonds due in 2034, 4.851% in 2045 and 5.087% in 2052, according to the final pricing wire. Spreads to Refinitiv MMD's AAA taxable scale were +24 basis points in 2034, +50 in 2045 and +67 in 2052. Spreads over U.S. Treasuries were 115, 175, and 180 basis points.

Dan Botoff, RBC’s global head of syndicate for debt capital markets, said “a lot of nuance” went into the bonds’ pricing, including looking at recent securitizations out of Louisiana and Texas.

“The most important dynamic for the market was where the most recent securitizations of rate recovery bonds had priced, much more so than where a few different corporate credits were trading in the secondary market,” he said, adding oversubscription for all three tranches of the Oklahoma deal allowed underwriters to tighten pricing.

Botoff added that bonds were priced on Friday instead of this week because “the book was there” and the deal avoided this week’s heavy supply, which includes $3.25 billion of wildfire recovery bonds for PG&E.

“The spreads are a tad cheaper for paper that is rated AAA,  but is not out of line for a utility,” said John Hallacy, founder of John Hallacy Consulting LLC.

Joseph Fichera, chief executive officer of Saber Partners, a financial advisory firm for corporations and public utility regulators, said on Monday that the interest rates on all of the bond tranches were “much higher than what similar-rated corporate bonds yielded during trading among institutional investors on Thursday and Friday.”

The bonds will be paid off with winter-event securitization (WES) charges imposed on the company’s existing and future Oklahoma customers under an irrevocable and non-appealable financing order from the state’s corporation commission. 

The bonds were made possible by legislation passed in Oklahoma last year that created a securitization framework to deal with billions of dollars in increased energy costs incurred by utilities during the storm. The securitizations are limited to Uri-related fuel costs for utilities that fall under the Oklahoma Corporation Commission’s oversight.

The bonds for OG&E received initial triple-A ratings from S&P Global Ratings and Fitch Ratings. 

In its rating report, S&P cited a multi-step approval process for the bonds that was “unlike most other ratepayer-backed/stranded cost securitizations.”

That process involved approval of the bonds by the ODFA board and the state’s Council of Bond Oversight. Then the bonds went to the Oklahoma Supreme Court, where 15 individual opponents questioned if the debt was properly authorized or constitutional. Justices validated the debt in May. The bonds received preliminary approval from the Oklahoma Attorney General on June 7, according to S&P.

Both rating agencies cited the deal’s true-up mechanism as a positive factor for the transaction.

“Mandatory semi-annual true-up filings adjust WES charges to ensure collections are sufficient to provide all scheduled payments of principal and interest, pay fees and expenses, and replenish the debt service reserve subaccount (0.50% of the initial bond issuance) over the following 12 months,” Fitch said in a report. “Furthermore, interim true ups may occur at any time, if necessary.”

Oklahoma’s high court subsequently validated up to $1.45 billion of bonds for the Oklahoma Natural Gas Company, up to $725 million of bonds for the Public Service Company of Oklahoma, and up to $95 million of bonds for Summit Utilities Oklahoma. 

Mike Newman, senior managing director at Hilltop Securities Inc., the issuer's financial advisor, said those deals were expected to price later this month, next month, and possibly in early September. 

Texas, which operates its own unregulated electric grid, suffered the largest problems from the 2021 storm, which contributed to at least 210 deaths in the state. Fuel prices spiked and days-long power outages spanned most of the state. More than 26 million Texas customers, or nearly 90% of the state’s population, depend on the Electric Reliability Council of Texas for electricity services.

Laws enacted by the state last year allowed for securitizations and default balance financings.

In the latest Texas deal, Citigroup and Barclays in June priced $2.1 billion of recovery bonds sponsored by ERCOT that were only offered to qualified institutional buyers. The four tranches of bonds, which had final maturities in 2036, 2044, 2048, and 2052, fetched interest rates that ranged from 4.264% to 5.167%.

The bonds, which were rated Aaa by Moody’s Investors Service, are ultimately repaid by uplift charges that municipal-owned utilities, electric cooperatives, or certain retail providers collect from end-user electricity consumers in the ERCOT region.

“The true-up adjustment mechanism (for the charges) is the primary form of credit enhancement supporting the bonds,” Moody’s said in a report.

Still to come is a bond issue to raise $3.4 billion for extraordinary costs incurred by Texas natural gas utilities during the 2021 storm. The taxable customer rate relief bonds will be issued through the nonprofit Texas Natural Gas Securitization Finance Corporation, which was formed by the Texas Public Finance Authority.

Jefferies was selected in May as senior underwriter for the deal, which could be priced in August.

The debt will be repaid with charges imposed on customers of eight natural gas utility local distribution companies, which were hit with huge costs for the commodity needed to heat homes and businesses as well as generate electricity.

The storm continued to be a factor in recent ratings.

Fitch Ratings last week downgraded about $2 billion of Dallas water and sewer revenue bonds to AA from AA-plus, citing elevated leverage that increased over the last three years due to factors that included higher chemical and power costs related to the storm.

Moody’s maintained a negative outlook on its Aa1 rating for New Braunfels Utilities, Texas, ahead of a bond refunding last month. The negative outlook was assigned in March 2021 after the storm forced a large draw on the electric, water, and sewer utility’s liquidity to pay outsized electricity costs. 

“Coverage for fiscal 2022 will likely be below pre-storm levels though the system has almost fully recovered the costs related to the storm,” Moody’s said in a report. “A return to stability is dependent on the utility's ability to return to pre-storm liquidity and debt service coverage levels, which management expects to achieve over the next 12 months.”