National Post (National Edition)
Texas deep freeze ... Canadian side effects
ONTARIO, QUEBEC UTILITIES FACE HEAVY LOSSES IN CLIMATE CHANGE RECKONING
For investors and companies that spent years ignoring climate risks, the storm that buried much of Texas in frost and snow this month is sending a wake-up call that's reverberating even in Canada.
In recent years, at least three Canadian utilities had spied opportunities for predictable cash flows in the loosely regulated Texas electricity market. but they failed to foresee the climate-related risk.
One of those companies, Mississauga, Ont.-based Just energy Group, a retail utility providing power from natural gas and renewable energy sources, told investors this week that it is now teetering on insolvency after incurring an estimated $315 million in losses as a result of the Texas storm. Analysts, who pegged the company's liquidity at $138 million, said that unless the Texas government provides relief, or key shareholders provide capital, the company may not be able to continue as a going concern.
That's forced a reckoning for the way investors and analysts calculate Just energy's risk: In the wake of the storm, at least three analysts have cut their price target from $10 to $2 or less, in light of the new risks the company faces.
“We have reduced our price target ... to reflect the extreme weather in Texas and potential liquidity concerns,” the RBC dominion Securities Inc. analysts wrote in a note titled, `Winter storm has passed, but outlook remains very cloudy.'
Its stock price has dropped by 55 per cent from $10.30 per share at the start of the month to $4.60 as of Wednesday.
Nor is it alone. Oakville, Ont.-based Algonquin Power & utilities Corp. announced last week it may lose as much as $55 million as a result of the storm, having just spent around $300 million to acquire four winds projects in Texas in late 2020. Meanwhile, Longuiel, Que.-based Innergex renewable energy Inc. said it may lose between $45 million and $60 million.
Since the start of February, Algonquin's stock has dropped 10.2 per cent and Innergex 17.5 per cent. The S&P/TSX Capped utilities index has declined 3.7 per cent this month.
The losses amount to fallout from the cold weather in Texas, which froze natural gas wells and wind turbines, leading to a steep drop in energy supply just as demand picked up because people turned up the heat in their homes.
A loss of energy supply, coinciding with a rise in energy demand led to huge price spikes, with the cost of one megawatt hour rising from Us$25 under normal weather conditions, to US$9,000 per megawatt hour.
While Just energy, Algonquin and Innergex all operate wind turbines in Texas that normally supply power, they also have contractual obligations that require them to deliver power, even in highpriced environments, even if their equipment fails.
Of course, they may also benefit from the high-priced environment. Innnergex told investors that the spike in prices could still have a net favourable impact on its revenues. The exact impact for any company isn't yet clear, as everyone waits to see whether the Texas government passes legislation or intervenes to offset the extreme financial impacts of the event on business and retail customers, and as new data roll in and energy contracts continue to settle.
This week, Texas Governor Greg Abbott warned utility companies not to send customers huge bills racked up during the price surge, or cut off their service for non-payment, at least in the interim.
In any case, analysts are already changing the way they value utilities in Texas, which had once been considered a reliable generator of steady cash flows, but which now need an updated risk assessment.
rupert Merer, an analyst with National bank Financial who covers Algonquin, said up until now analysts have valued such companies by looking at their long-term average annual power production and the estimated annual average power price.
“What's changed is not so much how we're going to model the future of the projects, but how much risk we think there is in those assets,” Merer said. “because now, maybe instead of this (type of storm) happening once every 100 years, maybe it's more frequent?”
In a note to investors, he wrote that Algonquin could declare a force majeure — the legal term for unforeseeable circumstances that prevent someone from fulfilling a contract.
but even if it did so, “the hit to investor sentiment could be larger, with reduced confidence in Texas wind generation.”
he said in an interview he believes the market will view these utilities as more risky assets going forward, which will affect the trade price. In part, the Texas market may require new investments upfront.
“I think going forward, investments in Texas will be more mindful of risk, so perhaps you want to winterize your wind turbines?” said Merer. “It was a very competitive market, which meant that to compete … (companies) had to keep their costs as little as possible, so a lot of them may have cut corners.”
Increased recognition of the risk marks a change in mindset from before the storm.
Mark Jarvi at CIBC Capital Markets, noted Just energy had recently “unwound some insurance coverage, which made it more exposed.” Valuing the company is highly complex at the moment, he wrote.
“While legislative intervention might provide some cushion (we don't assume that happens) and lead to less equity erosion,” he wrote, “the losses could be even higher than initially estimated implying further potential downside.”