CPS Energy’s bond rating takes a hit, despite rate hike meant to protect it

Moody’s downgraded the utility’s bond rating because of looming debt from February freeze

San Antonio City Council approves CPS Energy rate hike

San Antonio – A rating agency has taken CPS Energy’s bond rating down a notch less than two weeks after city council passed a rate increase that was supposed to help keep the utility’s credit strong.

Moody’s Investor’s Service announced Monday it had downgraded CPS Energy’s senior lien revenue bond rating from Aa1 to Aa2 and its junior lien revenue bond rating from Aa2 to Aa3. Bond ratings factor into how much interest the utility has to pay when borrowing money.

In an emailed statement Monday evening, CPS Energy said Moody’s Aa2 rating is still higher than the ratings it currently has from two other rating agencies, S&P and Fitch, and it does “not anticipate this change to impact our customers.”

The utility had used maintaining its financial health, including its bond rating, as a reason to pass a rate hike earlier this month.

“If our credit rating was downgraded, that means higher interest payments and less investment in our system,” interim CEO and President Rudy Garza told council members ahead of the Jan. 13 rate vote.

The city council ended up passing the two-part rate proposal in a pair of split votes. The first portion, a 3.85 percent increase to the base rate is meant to cover operating and planning costs for the utility, while the establishment of a “regulatory asset” is to pay off fuel and energy costs from the 2021 February freeze.

Although CPS Energy was hit with more than $1 billion in fuel and energy costs as prices soared during the freeze, it is still fighting many of those bills. So far, it has paid out $418 million, while another $587 million remains in dispute.

The regulatory asset only covers the portion the utility has paid so far. It will show up on customers’ bills as an increase in their fuel charge - about $1.26 more per month for the average homeowner. However, Garza told reporters after the vote that amount “will rise” as the utility settles more bills.

That would also mean the utility has to take on more debt to pay those bills - an eventuality that played a part in the downgrade.

“We expect CPS Energy’s adjusted debt ratio, including Moody’s adjusted net pension liability (ANPL), will move closer to 80% over the next three years and potentially exceed that level if CPS Energy ends up paying a portion or all of the disputed charges,” Moody’s wrote in its rationale for the downgrade.

The rating agency wrote that the rating reflects its expectation that the financial and leverage metrics “are more closely aligned with similar rated peers.”

It also noted there was risk in the lack of “meaningful reliability improvements” implemented at scale across the state’s grid and supply chains.

The rating agency also included “strained customer relations” and the need to rebuild credibility after “a wave of executive departures” as representing increased risk.

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On the positive side, Moody’s acknowledged CPS Energy’s efforts to prevent against another freeze and called the 3.85 % increase to the base rate “a credit positive achievement.” The rating agency anticipated further rate increases over the next five years - something CPS Energy officials have said is coming.

Fitch and S&P had previously downgraded CPS Energy’s bond rating following the February freeze. Though Moody’s changed its outlook on CPS Energy from “stable” to “negative” at the time, it did not downgrade the utility’s bond rating.

Inversely, Moody’s rating downgrade announcement also came with a change to a “stable” outlook, which the utility latched onto as a “very positive development” in its statement.

“It’s a signal that they perceive our approach to current and future rate plans as comprehensive,” reads the utility’s statement.”

About the Author:

Garrett Brnger is a reporter with KSAT 12.