More 2021 Polar Vortex Fallout: Securitization Bills, Not Satisfying Rating Methodologies Requirements, Unlikely to Get Highest Possible Ratings

Mayer Brown - Energy Forward
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Mayer Brown - Energy Forward

In the aftermath of Winter Storm Uri and the market turmoil that ensued, legislation that contemplates using securitization to potentially fund related economic damages and other dislocation has been proposed in both Texas and Oklahoma; however, in many cases, the proposed legislation does not contemplate critical requirements under the applicable rating agency methodologies. Consequently, any attempted transaction might not obtain the highest possible ratings—one of the key benefits to using securitization.

For example, in Texas there are at least 40 pending bills relating to fallout from Uri, and, of these, at least seven (not counting companion bills) propose the use of securitization. While a detailed review of each of the bills is not practical, a summary of them follows.

TEXAS

Electric Utilities

Senate Bill 1757: Relating to securitizing costs associated with electric markets; granting authority to issue bonds.
Description: CSSB 1757 would create the Texas Electric Securitization Corp., a securitization corporation to provide a lower-cost financing mechanism for securitizing unpaid and short-paid invoices to the Electric Reliability Council of Texas (ERCOT). The issuance must be used for the purposes of financing default balances that would otherwise be uplifted to ERCOT’s wholesale market participants as a result of market participants defaulting on amounts owed after an extreme pricing event. The bill calls for costs to be allocated on the same basis as the underlying default would have been uplifted to the entire market pursuant to the current ERCOT default uplift protocols. A committee substitute bill, which added further explanation of non-bypassable allocation charges to ensure entities cannot exit the market to escape uplift charges to the filed bill, was adopted on April 13 by the Senate Committee on Business & Commerce and recommended to the full Senate.

House Bill 4492: Relating to securitizing costs associated with electric markets; granting authority to issue bonds.

Electric Cooperatives

Senate Bill 1580: Relating to the use of securitization by electric cooperatives to address certain weather-related extraordinary costs and expenses.
Description: CSSB 1580 provides electric cooperatives the option to utilize the financial tool of securitized financing to fund the unprecedented impact of Uri. The costs incurred during the winter freeze will be entirely built into the rates of electric co-op members.

Senate Bill 1950: Relating to the use of securitization by electric cooperatives to address extraordinary costs and expenses resulting from Uri.

House Bill 3544: Relating to the restructuring of certain electric utility providers.
Description: CSHB 3544 aims to amend the utilities code to allow electric cooperatives to use securitization financing.

Gas Utilities

House Bill 1520: Relating to the recovery and securitization of certain extraordinary costs incurred by certain gas utilities; providing authority to issue bonds and impose fees and assessments.
Companion bill: Senate Bill 1579.
Description: CSHB 1520 seeks to provide rate relief to customers and support the financial strength and stability of gas utility companies by providing securitization financing for gas utilities to recover applicable extraordinary costs incurred from catastrophic events.

Senate Bill 1579: Relating to the recovery and securitization of extraordinary costs incurred by certain gas utilities; authority to issue bonds.
Companion bill: House Bill 1520.

OKLAHOMA

Similarly, in Oklahoma, Senate Bill 1049 (adopted and sent to the governor on April 20), relating to unregulated utilities, authorizes the Oklahoma Development Finance Authority to provide a pooled loan program for specified costs incurred for a specific time period by certain utilities.

TAKEAWAY

While a thorough examination of the rating methodologies of the three major rating agencies1 is beyond the scope of this article, the key requirements of each methodology are relatively clear:

  1. There must be a public hearing on the merits that concludes that the securitization is the best option;
  2. The hearing must be before a governmental body with rate-making authority over the applicant;
  3. The body must issue a financing order authorizing irrevocable and non-bypassable charges that are a recognized property right and that can be/are pledged to support the related bonds;
  4. The state must provide a non-interference pledge; and
  5. The financing order must permit periodic adjustments of rates and collections to ensure that all principal and interest on the bonds is sold in a timely manner.

In almost all of the pending bills, one or more of these key requirements is absent.

 

1 For Fitch Ratings, click here; for Moody’s Investors Service, log in here; for Standard & Poor’s, log in here.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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