Winter Storm Uri continues to blow through the bond market

Bonds

A fierce winter storm that hit several states more than two years ago is still churning out bond-related events, with a Texas utility refunding taxable tendered debt with tax-free bonds thanks to a private letter ruling, and an Oklahoma deal falling short on a debt service payment.

Billions of dollars of debt has been sold for public and private utilities to pay for natural gas and power purchases they made at sky-high prices during Winter Storm Uri, which pummeled the Southwest with snow, ice, and high winds amid record low temperatures in February 2021. The bond issues, authorized by state legislatures, regulators, and local governments, allowed the costs to be spread out over time to lessen the impact on customers’ utility bills. 

Armed with an Internal Revenue Service private letter ruling, San Antonio’s CPS Energy sold tax-exempt bonds this week to pay a tender offer for taxable bonds issued in 2022 that financed a portion of more than $900 million in unexpected costs incurred during the storm, according to Cory Kuchinsky, the city-owned public utility’s chief financial officer.

“Ultimately it is about savings for our customers, so it’s a net positive for everyone here in San Antonio,” he said ahead of the deal’s pricing.

The city council approved a plan that is expected to amortize the storm-related costs over 25 years with additional fuel charges on customers’ monthly bills.  

CPS Energy, the nation’s largest community-owned provider of electric and natural gas services, saw record winter demand for electricity and natural gas amid soaring prices for the commodities. It became a power purchaser when its generation plants were unable at times to produce enough energy. The resulting financial pressures led to bond rating downgrades in March 2021.

The March 3 private letter ruling affirmed that certain Winter Storm Uri-related costs and charges incurred by the utility can be refinanced on a tax-exempt basis due to the extraordinary nature of those costs, the preliminary official statement for the tax-exempt refunding bonds said.

A tender offer was launched earlier this month to entice bondholders to turn in their bonds at a premium of up to 4% above current market values for the debt, according to the utility.

Bondholders opted to return and the utility accepted nearly 32% of the $405.35 million of 2022 bonds targeted for the tender, the utility disclosed in a notice posted Wednesday on the Municipal Securities Rulemaking Board’s EMMA website.

The revenue refunding issue involving the tender, which was structured with maturities from 2028 to 2044, was priced May 23 with a top yield of 4.40% for bonds due in 2043 with a 4% coupon. The bonds were rated AA-minus by Fitch Ratings and S&P Global Ratings and Aa2 by Moody’s Investors Service.

The private letter ruling applied to the $133.2 million Series 2023B that priced this week. It was sold along with a $456.8 million Series 2023A in a deal led by Loop Capital and JPMorgan.

PFM and Estrada Hinojosa were co-municipal advisors. McCall Parkhurst & Horton and Kassahn and Ortiz were co-bond counsel.

S&P said since the storm, CPS Energy has prioritized the preservation of on-balance-sheet liquidity, disputed some natural gas costs related to the storm, and refined its power supply strategy. 

“The rating in part reflects our view of CPS Energy’s most recent electric and gas base-rate increase of 3.85% and fuel adjustment effective March 1, 2022, which we believe will support continued healthy coverage in the near term despite an increase in debt service requirements to more than $465 million in fiscal 2024 from $422 million in fiscal 2023,” S&P said in a report. 

It added that another factor is the need for more frequent rate increases over five years for the utility’s $4.3 billion capital program and for increased debt service payments.

A negative rating outlook is due to rate affordability pressures given already high customer delinquencies. 

“While recent financial metrics have been solid, we could lower the rating if higher retail rates necessary to discharge financial obligations related to the severe weather event of February 2021 and in support of capital projects exacerbate affordability and delinquency,” the report said. 

Fitch, which also has a negative outlook on its rating, said CPS Energy’s financial profile “has exhibited some weakening in the past three years as the utility used long-term debt to finance a portion of the elevated purchased power and natural gas fuel costs incurred during the February 2021 winter storm event.”

Meanwhile, CPS Energy is suing three of its natural gas suppliers in Bexar County District Court claiming more than $350 million in charges during the storm were unconscionable and violated Texas public policy. 

Depending on the outcome of the litigation, the utility could take advantage of the IRS ruling in the future to issue tax-free bonds, Kuchinsky said. 

In Oklahoma, one of the four storm-related taxable bond deals the state development finance authority issued last year for utilities reported revenue from winter-event securitization charges on ratepayers’ bills fell short of a $68.27 million May 1 debt service payment.

The $1.35 billion bond issue for Oklahoma Natural Gas Company, the largest of the four deals, tapped a debt service reserve fund for nearly $1.148 million to make the payment, as well as to cover about $507,000 in ongoing financing costs that were due, according to a disclosure notice posted on the EMMA website.

The notice said the deal’s servicer “anticipates, but cannot guarantee” enough revenue will be collected for the Nov. 1 bond payment, ongoing financing fees, and to replenish the debt service reserve fund to its required level. 

A true-up mechanism to ensure sufficient collections from customers was included in the Oklahoma deals. An Oklahoma Natural Gas Company spokesman said a proposed adjustment to the winter-event securitization charge will be submitted to the state’s public utility division, which will have 30 days to review it.

“I don’t have any concerns about the other three bond issues and I really don’t have concerns about this one,” said Michael Davis, the Oklahoma Development Finance Authority’s president and CEO . “For whatever reason their collections did not meet projections and they were short, but going forward we won’t have that issue.” 

Fitch, which rated the bonds for Oklahoma Natural Gas AAA, said in a commentary published Monday that while there was no immediate rating impact from the inaccurate estimate of the required charges, it will continue to monitor future charges to ensure the debt service reserve fund is fully replenished to its target level. 

A $3.5 billion taxable Texas deal was sold in March for natural gas utilities under a 2021 state law authorizing securitization financing for natural gas providers to extend the period over which their customers pay back high costs incurred during the storm.

The deal included a limited make-whole redemption over the next three years in the event Texas lawmakers decide to appropriate state money to pay off all or some of the debt.

The fate of such an appropriation was unclear as the legislative session headed into its final days.