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Despite looming political pressures and a financial squeeze driven by the coronavirus pandemic, CPS Energy maintained its existing high bond ratings in credit rating agency reviews released this week.
However, Fitch Ratings downgraded its outlook for CPS Energy from “stable” to “negative,” in part citing a petition drive by environmental and social justice groups looking to close the utility’s two remaining coal-fired units by 2030.
“The negative outlook reflects Fitch’s concern that rate increases required to maintain a financial profile consistent with the current rating may not materialize,” the Oct. 15 Fitch report states. “The risk is somewhat heightened by the broader economic stress caused by the pandemic, which could impact City Council’s willingness to approve, without delay, the full amount of a rate request.”
Bond ratings are measures of creditworthiness that investors use to weigh the risk associated with lending to an entity such as CPS Energy, and they help determine interest rates on the utility’s debt. Fitch was the only of the three major ratings agencies – Fitch, Moody’s Investors Service, and S&P Global – to change its outlook for bonds issued by San Antonio’s municipally owned electric and gas utility.
Like other utilities and governments, the pandemic has depressed CPS Energy’s revenues. After ending last year with a $145 million profit, utility executives are currently projecting a net loss of at least $20 million by the end of the current fiscal year, which ends in January 2021.
CPS Energy Chief Financial Officer Gary Gold said the number of residential and business accounts that have fallen far enough behind on payments to qualify for shutoff has swelled to 67,000, twice what it was last year. The utility has approximately 840,000 electric and 350,000 natural gas customers. It stopped disconnecting its customers in March and does not plan to resume for the rest of the year, President and CEO Paula Gold-Williams said.
On Friday, CPS Energy officials signaled their plans to next year begin seeking a rate increase of 5 percent to 8 percent for average residential users, according to a news release. However, the increase could be higher. San Antonio’s City Council must approve any rate increase.
“We’ll do all we can to try to keep rates in this range,” Gold-Williams said, adding that “things above 10 percent become much more expensive.”
With the ability to make money selling power on the Texas grid, CPS Energy has managed to avoid increasing its customers’ rates for six years, with the most recent 4.25-percent increase taking effect in February 2014.
CPS Energy’s residential customers now pay 6.9 cents per kilowatt-hour, plus an $8.75 service charge. In the high-demand months of June through September, CPS Energy adds roughly an extra 2 cents per kilowatt-hour for residential customers whose usage exceeds 600 kilowatt-hours. Commercial users pay the same $8.75 monthly charge, plus 7.2 cents per kilowatt-hour for the first 1,600 kilowatt-hours, then the rate drops to 3.3 cents per kilowatt-hour for additional use.
The likely push to raise rates next year comes even as the utility continues to provide approximately 14 percent of its gross revenue to the City of San Antonio, money that accounts for about a third of the City’s general fund budget. The utility expects to provide more than $325 million this year.
“For all the pressure that our customers are experiencing, CPS Energy is in turn having the same pressure,” Gold-Williams said. “CPS Energy has typically always had a net profit. We’re a business owned by the community. But the difference between us and other companies is that profit is reinvested into this community.”
In their most recent reviews, all three ratings agencies mentioned the Recall CPS petition drive as a source of potential uncertainty in CPS Energy’s ability to raise rates and keep itself in a strong financial position. The petition seeks to place a charter amendment on the May 2021 ballot that would change the utility’s governing structure and force a shift away from coal and natural gas.
Despite City Council having the final say over rates, Moody’s described CPS Energy as currently having a “self-regulated rate making ability,” the loss of which would be “viewed as a credit negative.”
The Fitch review called the petition an “asymmetric additive risk consideration” that “would likely result in additional political pressure on the utility, and could constrain the utility’s rate-setting ability or operational decisions.”
“We will continue to monitor whether this potential charter amendment is successful and assess its effect on the utility’s operational and financial profiles,” the S&P report states.
Over the coming months, bond ratings likely will play a significant role in the tug-of-war over the charter amendment petition. Environmentalists, backed by influential progressive groups like MOVE Texas and Texas Organizing Project, have been gathering signatures during high-turnout early voting that began this week. They hope to get 20,000 signatures this year to put the amendment on the May 2021 ballot.
If ultimately approved by voters, the charter amendment would eliminate CPS Energy’s board and replace it with direct City Council oversight. The petition would also require the closure of CPS Energy’s Spruce coal plant by 2030 and divest entirely from fossil fuels by 2040. It would require the utility to put a price incentive on conservation so that the more power a customer uses, the more it costs.
The utility’s generation capacity mix is 45 percent natural gas, 18 percent coal, 15 percent wind, 14 percent nuclear, 7 percent solar, and less than 1 percent landfill gas. CPS Energy recently put out a global call for new solar, energy storage, and generation projects to replace aging gas plants and its Spruce 1 coal unit, though it has not set a shut-down date for Spruce 2, completed in 2010.
Environmentalists are frustrated by what they see as the utility’s lack of transparency about how closing Spruce would affect its customers’ bills. The petition came after a steady breakdown in private negotiations between activists and utility officials. The utility has also sent conflicting messages on a City Council commitment to shift entirely away from fossil fuels by 2050.
“It’s been difficult, and we’ve had to go so far as filing an open records request and still not getting answers from them that the public deserves to know,” said DeeDee Belmares, a San Antonio-based organizer with Public Citizen. “Because this could ultimately affect our rates, and we know that it’s definitely affecting the air that we breathe.”
On Friday, Gold-Williams criticized environmentalists for wanting to move too quickly away from coal and gas, which could expose San Antonio customers to “rate shock.” She also said their motivations are “specifically based upon an ideology.”
“It’s terrible that people across the globe who see us really doing great things have to read these headlines, and they see that San Antonio, which typically is very collaborative, which is typically ahead of the game, which is typically admired, is being pulled down in these politics,” Gold-Williams said. “It will potentially affect how people want to join us to help solve issues. And right now, it looks like it’s going to start to affect us financially.”
DeeDee Belmares is a member of the San Antonio Report’s board of community advisors, and CPS Energy is a financial supporter of the San Antonio Report. For a full list of business members, click here.