Bonds

Texas utility sheds negative rating outlooks ahead of bond sale

San Antonio’s CPS Energy will head to the municipal bond market next month with a big debt sale involving a tender offer and improved outlooks for two of its credit ratings.

Fitch Ratings and S&P Global Ratings, which both rated the upcoming $1.05 billion electric and gas systems revenue bond deal AA-minus, revised their outlooks on the utility to stable from negative. 

As Winter Storm Uri pounded Texas and other states with snow, ice, and high winds amid record-low temperatures in February 2021, CPS Energy incurred more than $900 million in extraordinary costs.

Bloomberg News

“The outlook revision reflects our view of the electric and gas systems’ improved risk management given recent large generation additions to its portfolio and other steps taken to reduce exposure to often high Electric Reliability Council of Texas (ERCOT) market prices, especially during peak demand events resulting from extreme weather,” S&P analyst Paul Dyson said in a statement.

The move also reflects better management of delinquent customer balances and the approval of a 4.25% base rate increase for fiscal 2025, he added. 

Fitch cited its improved view of the operating risk for utilities participating in the ERCOT regional market, as well as CPS Energy’s “very strong financial profile.” It pointed out the utility still faces “strong headwinds” from more than $900 million of costs it incurred during February 2021’s Winter Storm Uri, although some of those costs are being contested. 

CPS Energy, the nation’s largest community-owned provider of electric and natural gas services, saw record demand for electricity and natural gas amid soaring prices for the commodities during the fierce storm. 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.

In a statement, CPS Energy said, “This positive action reaffirms our strong track record of working through challenging operating conditions in a rapidly evolving energy industry.” 

S&P said it could raise the utility’s rating over the next two years if there is “additional significant progress toward reducing delinquent account balances, continued resilience during peak demand events, and fulfillment or surpassing of financial metrics forecasts.” ERCOT market price volatility remains a concern, it added.

The utility’s upcoming bond issue, which was rated Aa2 with a stable outlook by Moody’s Ratings, is scheduled to be priced by a team of underwriters led by Jefferies and Wells Fargo Securities on June 4. The deal includes proceeds to pay a tender offer that launched May 14 and expires May 31 for targeted outstanding taxable bonds.

This is the utility’s second tender of taxable bonds using tax-exempt proceeds under a March 2023 Internal Revenue Service private letter ruling. The federal agency affirmed certain costs and charges incurred by CPA Energy related to Winter Storm Uri and financed with taxable bonds can be refinanced on a tax-exempt basis due to the extraordinary nature of those costs. 

For the first tender, which was funded in a May 2023 bond sale, bondholders returned nearly 32% of the $405.35 million of the 2022 bonds targeted.

In addition to funding the bond tender, the deal will also refund short-term notes and commercial paper with long-term bonds and finance capital projects, according to the preliminary official statement. 

The three series of bonds are structured with a final serial maturity in 2044. Each series includes term bonds due in 2049, with additional 2054 term bonds in Series B and C. 

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