CPS Energy’s credit rating takes a hit

Downgrade by 2 agencies reflects huge bills after power crisis during the freeze in Texas

As CPS Energy wrestles with more than $1 billion in debt from last month's winter storm, credit rating agencies are getting nervous about the utility's financial health.

Fitch Ratings cut CPS'S bond rating, and both Fitch and Moody's Investor Services changed their outlook for the cityowned utility from stable to negative.

The rating agencies cited concern over how CPS will pay off bills the utility racked up buying natural gas and wholesale power at sky-high prices during last month.

The bond-rating downgrade “reflects CPS Energy's weakened financial profile resulting from higher purchased power and natural gas fuel costs following the unprecedented winter weather,” Fitch analysts said.

It could be nearly politically impossible to raise customers' rates to cover the costs after hundreds of thousands of households citywide went without power and water for days during the storm. However, not raising rates could leave CPS in an even more financially precarious position, the rating agencies said.

“We know the credit ratings agencies are watching all significant activities in San Antonio closely,” CPS CEO Paula Gold-williams said. “Every day we are focused on operating efficiently and are working diligently to return the outlook to ‘Stable,' across the board.”

CPS Energy sells bonds to cover the cost of large investments such as the construction of a power plant or other major upgrades. Investors buy those bonds, and CPS pays back bondholders with interest over a fixed time period.

Rating agencies determine how likely an entity, such as CPS, is to pay off its debt on time. The agencies each issue a rating to let investors know how risky it is to buy that entity's bonds.

Fitch downgraded CPS'S bond rating from AA+ — the agency's second highest credit rating — to AA-.

The lower a company's rating, the riskier it is for investors to buy

its bonds. And investors expect higher interest payments on riskier bonds. In other words, CPS eventually could be forced to raise rates to cover higher debt costs.

But that likely won’t happen yet.

Fitch and Moody’s both noted CPS will be able to cover the storm-related costs in the short term with cash on hand and an additional $500 million in financing the utility’s board approved last week.

“The outlook could be stabilized, however, if the ultimate financial

impact to be absorbed by CPS Energy is significantly below what the utility is currently estimating,” Moody’s analysts said.

CPS officials have said they will challenge some of the expenses in court. Rudy Garza, a CPS executive, said some of its natural gas suppliers may have gouged the utility.

CPS is also asking the state and federal governments to help reduce or eliminate CPS’ debt stemming from the storm.

But if CPS is forced to pay off the $1 billion tab, it likely would spread out the cost over 10 to 20 years on customers’ bills. The move, if the utility makes it, could result in Moody’s cutting its rating.

“In the event the financial impact to be absorbed by CPS is large,” Moody’s analysts said, “there would be negative pressure on the rating given the expectation of sustained weaker credit metrics and liquidity as a result.”

Other municipally-owned utilities and rural electric cooperatives in Texas are also in financial trouble after buying electricity and gas on the spot market during the deep freeze.

The Brazos Electric Power Cooperative, which serves about 685,000 customers across Texas, filed for bankruptcy last week. The electricity provider said it didn’t have the money to pay ERCOT, the state’s grid operator, for

wholesale power that it bought at exorbitant prices.

Some expect the state to step in and protect electric companies from going off a financial cliff.

State Rep. Lyle Larson, R-san Antonio, said lawmakers should dip into the Texas Economic Stabilization Fund — the “rainy day” fund — to cover the higher energy costs.

“The state government of Texas has to intervene to protect Texans from utility rate hikes,” Larson said in a tweet.

Vistra Corp., one of the largest investor-owned utilities operating in Texas, last week recommended a condition for a state bailout: municipal and cooperative electric providers that take

the state’s money would have to allow other electricity providers to operate in their service area.

Allowing other power companies in cities such as San Antonio “would help to ensure customers are protected from significant price risks, while providing the added benefit of customer choice,” the company said.

CPS officials dismissed that proposal.

“Customers across the state were affected by the winter storm regardless of their provider,” Gold-williams said. “We remain focused on helping our customers.”