San Antonio's CPS Energy will refund Build America Bonds

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San Antonio’s CPS Energy, one of the largest public power utilities in the nation, will issue $244 million of debt to refund Build America Bonds as it proceeds with a $3.3 billion capital plan.

The city's municipal utility expects net present value savings of $44.7 million when the bonds price Oct. 17, officials told Moody's Investors Service. With all of its 2010A and B bonds refunded, CPS will have about $280 million of BABs remaining on the books.


The junior-lien bond deal is rated of Aa2 by Moody’s, AA-minus by S&P Global Ratings and AA-plus from Fitch Ratings with stable outlooks. Fitch assigns the same AA-plus rating to CPS Energy's junior- and senior-lien bonds. S&P and Moody's rate the senior-lien bonds a notch higher at AA and Aa1 respectively.

Fitch’s rating reflects “strong revenue defensibility, supported by the favorable demographic trends of its service area, including very strong customer growth, competitive rates and high rate flexibility,” analyst Kathryn Masterson said.

“Operating costs remain very low, even with recent shifts in power supply toward greater renewable sources to comply with the utility's self-imposed clean energy goals and the recent closure of one of the city's older coal-fired generation units,” she added.

At the end of 2018, CPS shut down its coal-fired Deely generating plant in Bexar County, but coal remains the source of 18% of the utility's electricity and is expected to remain so through 2030, according to Moody's. The coal units are in compliance with existing federal and state environmental regulations.

For the first half of the year and the first time in history, wind energy surpassed coal-fired generation in Texas, according to the Electric Reliability Council of Texas, the main grid operator for the state.

Wind created 22% of the electricity used in the first half of the year, edging out coal by 1%, ERCOT said.

Texas is the largest consumer of coal in the country, according to the Energy Information Administration. But cheap natural gas and renewable energy prices are eroding coal’s market share.

Natural gas continues to produce more electricity than any other source, at 38% while solar energy accounts for a mere 1% of Texas electricity production.

Since 2000, installed wind capacity in the ERCOT region has increased from just over 100 megawatts to more than 22,000 MW as of July 2019, per ERCOT.

On Aug. 13 and 15, the price of electricity reached the cap of $9,000 per megawatt-hour, according to the grid operator.

ERCOT chief executive Bill Magness briefed CPS Energy’s board on power consumption last week after an unusually hot September that prompted an alert to reduce consumption on the grid after two alerts in August.

“The changing resource mix in the ERCOT region has presented unique challenges for grid operators,” a September ERCOT report noted. “In response, ERCOT has evolved its technical requirements and market rules, as well as developed new analytical and monitoring tools, to manage a diverse resource mix while maintaining system reliability and market efficiency.”

In March 2018, CPS Energy announced its new policy known as “Flexible Path” that will guide its integration of newly available energy sources.

The utility plans to leverage its existing community-owned generation assets to bridge to a future that enables more non-emitting resources such as wind, solar, energy storage and new technology.

“While this objective represents a challenge, it appears to be a measured plan to balance clean energy and system reliability and customer growth,” Moody’s analyst Jennifer Chang said in a ratings report on the upcoming deal.

‘Moreover, the diverse CPS Energy's fuel mix that includes nuclear, coal, natural gas and renewable resources remains well managed and provides the utility with ample flexibility to remain cost competitive as it focuses on sustainability objectives,” she wrote. “That said, CPS Energy faces a continuing challenge managing market and commodity risks given its participation in the ERCOT day ahead market as lower energy prices caused by low natural gas prices and abundant wind energy has made its coal fleet less competitive.”

In February, CPS predicted it would end its fiscal year with only $2.1 million in net revenue, which would have been down from nearly $124 million in wholesale revenue last fiscal year. The strong revenue in the previous year allowed CPS to pay down $130 million in debt.

However, officials now expect the utility to end the year with $110.5 million in net revenue. That’s largely the result of $64 million in wholesale sales onto the state grid, far ahead of the $9 million in such sales projected only a month ago.

CPS’s debt ratio as of FY 2019 was 58%, according to Moody’s, while the adjusted debt ratio which includes Moody's adjustment for net pension liabilities was nearly 71%.

“The adjusted debt ratio is on the higher end relative to similarly rated peers and may modestly increase somewhat over the next few years with additional debt issuance for the implementation of the capital program,” Chang said. “We view the leverage levels as being manageable over the long-run given management's prudent capital spending programs, the amortizing debt structure of the debt portfolio, the plan to fund its capital spending with 50% debt and 50% internal sources, and the expectation for maintaining a strong liquidity profile.”

CPS Energy's debt is made up of 68% senior lien and 32% junior lien bonds.

The new issuance will move about $100 million of the Series 2010 A Senior bonds to the junior lien, while the remaining refunded Series 2010 B debt will remain on the junior lien. The Series 2019 junior lien revenue bonds' issuance will slightly increase the proportion of junior lien debt to approximately 33%.

The finance plan approved by the CPS Board of Trustees calls for the BABs to be refunded using tax-exempt debt.

CPS’s capital program through 2024 primarily focuses on expanding the electric system to accommodate the forecasted annual electric sales increases between 1-2% and gas sales increases between 0.5-1.5%. Construction projects include electric transmission, electric generation, electric distribution, general properties, and gas facilities.

The utility shares some of its revenues with the city, about $334 million in the current fiscal year.

San Antonio enjoys triple-A ratings on its general obligation debt.

The utility provides exclusive retail electric service to over 830,000 primarily residential electric customers and approximately 350,000 primarily residential gas customers.

Retail competition was introduced in Texas in 2000, giving municipal utilities in the state the option to offer retail competition in their service areas.

“CPS Energy has indicated no intent to do so to date and is the sole supplier of electricity in its service area,” Masterson said.

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