Despite recently improved credit rating outlooks announced earlier this month, CPS Energy’s five trustees remain at odds over the utility’s financial health.
Discussions between the trustees — namely between the sole conservative voice on the board, John Steen, and his four fellow board members — grew heated Monday as the group discussed the utility’s shifting generation portfolio.
Steen, who has continuously raised concerns about CPS Energy’s financial standing in the wake of the Covid-19 pandemic and Winter Storm Uri, said he is troubled with recent spending by the utility to bring additional megawatts under its ownership.
The buys are part of CPS Energy’s Vision 2027 strategic plan, which looks to shift away from older power-generating technologies responsible for higher carbon emissions to newer technologies that are more in line with the city’s climate action plan.
The utility’s four other trustees and several members of the staff contested Steen’s claim Monday that CPS Energy is “on a path to becoming over-leveraged,” referencing new credit rating outlooks issued in May by Fitch Ratings and S&P Global Ratings that shifted away from the utility having a negative outlook to having a stable outlook for the first time in several years.
“This is obviously an improvement in the financial condition of this organization, recognized now by those organizations and experts in finance,” said Mayor Ron Nirenberg, who sits on the board as a trustee in his official capacity. “I’m not going to debate whether that’s good news to you John — I think it is.”
Steen remained steadfast in his protests, however, that the utility is in fiscal discord, noting he is still concerned with the utility’s total in long-term debt, which totals roughly $7 billion.
“S&P and Fitch revising their credit outlooks from negative to stable is not an insignificant step in the right direction,” Steen said, “… [but] at the very minimum, we need to be setting our sights on a positive outlook, which indicates a rating may be raised.”
A shifting portfolio
Steen raised his concerns Monday prior to discussions about the utility’s summer preparedness, just after CPS Energy’s five trustees were given an update on where the utility’s generation plan stands.
Under Vision 2027, CPS Energy aims to completely phase out coal from its portfolio by shutting down the Spruce 1 coal-powered unit by 2028 (assuming the Electric Reliability Council of Texas will allow it) and converting the Spruce 2 unit to a natural gas plant by 2027, which would run indefinitely.
CPS Energy is also looking to close down its Braunig natural gas units by the end of next spring. Braunig, whose three units generate about 860 megawatts of power, is a steam turbine power plant fueled by natural gas.
If its current schedule of plant closures remains on track, CPS Energy will have dropped roughly 3,000 megawatts of fossil fuel generation out of its portfolio by 2030. One megawatt is enough electricity to power 250 Texas homes on a summer day.
CPS Energy has recently purchased three natural gas plants for $785 million from the Houston-based Talen Energy Corporation which can provide up to 1,710 megawatts of power and secured an additional 2% ownership of the South Texas Nuclear Project from Constellation equating to an additional 52 megawatts of nuclear power, Ethridge said.
Steen said these recent purchases concerned him — despite the fact they were board-approved last year — noting the only two ways to pay for these additions are by taking on more debt or increasing the base rate on CPS Energy’s customers. He also noted that as of March, one-fifth of CPS Energy customers are past due and that CPS Energy is also eyeing additional possible rate hikes on the horizon.
“I’m apprehensive that unless all this spending can somehow be reined in, we’re on a path to becoming over-leveraged,” Steen said. “CPS [Energy] is committing itself to — in my fear — what is a slippery slope of borrowing too much and burdening our customers too much.”
Improved outlooks from credit rating agencies
Despite Steen’s comments, CPS Energy’s new stable outlook revisions from S&P Global Ratings and Fitch Ratings came with positive feedback from the rating agencies. Both agencies also affirmed their previous ratings for the utility.
Credit ratings, which are given annually by three agencies — S&P Global Ratings, Fitch Ratings and Moody’s Ratings — are important to the utility’s overall financial health; rating downgrades would increase the utility’s borrowing costs, which would ultimately be borne by customers.
The utility suffered financial blows both when it paused charging and disconnecting delinquent customers during the pandemic for more than a year, and then following the outfall of Winter Storm Uri, which led CPS Energy to purchase roughly $1 billion of power from the Texas energy market. The result was credit rating downgrades by the agencies, which also largely blamed ERCOT for the instability of the market.
CPS Energy has since taken strides to regain lost ground, including launching assistance programs and legally battling the state’s grid operator in court for the charges incurred during the storm. As of March, CPS Energy officials said the utility may write off as much as $32 million of the $154.2 million it was owed from past due accounts.
In their latest reports, the rating agencies took notice — also acknowledging the utility has done well to capitalize on the state’s last two brutally hot summers in regard to wholesale opportunities within the Texas market.
“CPS Energy’s financial profile improved in fiscal 2024, … Substantial improvements in the utility’s operating cash flows were driven by outperformance of the utility’s wholesale sales resulting from elevated temperature during the 2023 summer, and increased energy demand,” Fitch analysts stated in their press release about their improved rating.
The S&P Global report said the revised outlook also reflects the agency’s view of the utility’s declining accounts receivable and doubtful account balances in the past fiscal year, improved management of delinquent customer balances, and approval of a 4.25% base rate increase for fiscal year 2025 “that demonstrates ratemaking ability in the face of moderately high monthly bills relative to income levels.”
Fitch also gave an improved view of the ERCOT market, stating “the PUCT and ERCOT officials have taken steps to limit future operational and financial risk to utilities in the form of additional weatherization requirements, a robust inspection program, increased attention to the timing of scheduled plant outages,” and more.
Both agencies did note CPS Energy’s recent acquisitions could weaken the utility’s future financial metrics, although they also took note they believe CPS Energy will likely “continue to generate sufficient cash flow” to support its operating expenses and noted the utility has said it has planned rate increases of up to 5.5% in 2027 and 2029.
Trustee and staff response
Nirenberg applauded the utility and its board at the start of Monday’s meeting for the outlook changes, stating it showed “true team effort.”
“…The fact that CPS [Energy] now has been recognized as a leader not only on the delivery service side, but also in terms of financial management and stability I think is something that we’ve got to take a moment to properly credit,” he said.
Steen argued with trustees Monday that the credit rating agencies’ new stable outlooks meant that CPS Energy was stably within instability. He argued a change in outlook is not a change in ratings.
“I say this respectfully, that that was not an upgrade that we received,” he said. “There are two things: there’s there’s a grade and then there’s an outlook and what we did was [get a new outlook].”
CPS Energy’s President and CEO Rudy Garza told the San Antonio Report following the meeting that Steen’s opinion on how to take the outlook changes is his own, but said personally he takes the outlook changes as a win.
“If we put a good strategy together and we find a way to pay for [costs] in a responsible way that still allows us to keep rates affordable, and the markets see that strategy and they react to it … positively … I’ll take that,” he said. “That’s a win for me all day long.”
